Spring Refinery Utilization and Import Model

I am in a graphing mood this morning. Note the above graph of unleaded products supplied, a.k.a "unleaded demand" for the last few years. The pattern was pretty consistent from 2005-2008 but in 2009 something really interesting happened: Everyone went out of town for Easter (April 15) and Memorial day, but aside from that, they parked the Family Truckster and stayed home.

You can see a really similar blip happening this year, since Easter was April 5th, it's offset by a couple of weeks, but we can sort of envision demand being more like last year than the previous two years. I am thinking unleaded products supplied will be about 9 this week, and eventually, in some trajectory, end up somewhere between 9.2 and 9.3 by the 4th of July. Maybe there will be a blip for Memorial Day like there was last year, with less traffic the weeks before and after....In another week or two we will have a lot better idea.

So to meet this demand, the refiners are going to scale up, because that is what they do, and people do what they do. They could probably satisfy any additional demand without running the refineries by increasing the imports around May 1, and that is indeed a possibility, but it seems pretty likely, based on our little observation, that the refinery utilization will be pretty close to what it was last year. The scale-up period this year happened a bit different than in 2008-2009, but I do not think they will be crazy enough to run at the same rate as the pre-Recession level.

So, if we make the educated guess that they are going to scale up from where they are now, which is 85.9% utilization to around 89, being a little generous because of the slightly higher demand this year, and this will happen in some sort of nearly linear trajectory, there will have to be some level of crude oil imports to support the increase. At the level of 9.3 mbpd, you can see that the overall crude oil inventory will decrease, at 9.8 a bit of a decrease, and at 10.3 a pretty substantial increase, assuming 5.4 mbpd domestic production, and inputs to refineries in about the same ratio as it is right now.

So, based on what we see here, what do you think imports will be over the next few weeks? Well, I think our friend the refinery manager went into the cubicle of his crude oil buyer sometime in the last month, and said the following: "I want you to order enough crude oil every month to keep our tank full. The reason for this is that the contango situation is telling us that crude oil will be more expensive in 2011 than it is in 2010. The way to minimize your cost over the next year is keep crude oil in storage. Here is our scale-up schedule. Make it happen. If the tank is not full, I want you to order a little extra every month and we will worry about finding a place for it later.".....

So, the third graph is three inventory scenarios, using different levels of crude oil imports, given the above assumptions about demand, refinery utilization, and inventory strategy....I did do the "goal seek" on this to determine that an import rate of 9.96 mbpd will be needed to keep the inventory of crude oil stable between now and the beginning of July, and I think that is exactly what is going to happen,

So, based on this, you turn the crank and get the forecast that we have posted in

http://usoilinventories.com/forecasts/default.html

The unleaded and distilate products supplied are running just about what our original model said, maybe a bit of fudging for Easter, but pretty close. The refiners are going to increase by about 0.3% per week, to get to 89% by July. Domestic production will be down a bit because of the platform disaster still unfolding out in the Gulf. Imports will have to increase to 10.0 at some point to keep the inventory stable, and I am guessing that this will happen sooner rather than later. We will continue to tilt the finished product ratio toward unleaded and away from distillates, because there are too many distillates around, with demand the way it is..... and summer around the corner.

So, I am seeing builds in all three of the categories this week. The post-Easter demand blip will hit unleaded and we will see a little build in that, and the rest is self-explanatory.

We science guys think like this. We can be like the meteorologists and come up with a theory about what is going to happen, and test it out by observation over the next couple of months. It will be interesting to see what happens.