Morning Petrospective – August 15, 2011

il prices and equities were under selling pressure early Friday morning and traders were talking again about European worries, especially over French banks. France and Germany were reportedly divided over their approaches to the continuing crisis, with their leaders scheduled to meet over the weekend. Very early on Friday morning, there were signs that it might be a rough day ahead. But, there was good short-covering and bargain-hunting, both in equities and oil. Oil prices ended the day down 34 cents and ended the week down $1.50 a barrel.

There were mixed signals on Friday. Retail sales increased in July by 0.5%, the biggest increase seen in four months and a sign that forecasts of a double-dip recession could be premature. At the same time, though, the Reuters/University of Michigan Consumer Sentiment index in August fell to 54.9 from 63.7 in July. Estimates had expected a number closer to 62, so this was a sign that recent declines in equities had sapped consumer confidence by much more than one would have expected. The latest reading was below the 55.3 low seen after the collapse of Lehman Brothers in September, 2008, so consumers are more frightened than they were back then.

That is an interesting observation, because it will be a lack of confidence more than any solid lack of business activity that will take us back into recession if we go there. Most economists prefer to base their forecasts on hard figures, and these are just not supporting a return to a recession later this year. But the decline in consumer confidence tells us a different story. People are scared. They are more frightened than any objective reading of the numbers would suggest. The last time the confidence measure was this low was in May, 1980. Just as a point of reference, interest rates were in the high teens and silver had reached $50 in March, 1980. Crude had reached its high of $39.80 in March, 1980, and sugar had topped 65 cents a pound then. We were in the middle of the Iranian hostage crisis, Ronald Reagan was fighting George H.W. Bush in the primaries, and we had just had even and odd license-plate gasoline rationing. It is hard to believe things are as bad as they seemed then. But we can agree: They have not been this bad since then.

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We are going with a large-ish crude draw this week because the four-year average for this week is a draw of 4 million bbls (for four of the last five years that were lower). There was one year (2008) that had a 9.39 million bbl build, and that brought the average draw down, but we had a draw of 8.4 million bbls in 2009 and a draw of 5.2 million bbls in 2007. And last week we had a draw of 5.2 million bbls. As a result, we are expecting a bigger than usual drawdown this week.

With time winding down, we really need a build in distillate stocks this week, especially with a 21.6 million barrel deficit against a year ago. It is 10.8 million bbls against two years ago, so we need to rebuild stocks for winter. And that should keep refineries chugging along, given strong refinery margins. That explains our estimate for a fairly big utilization increase. We expect the peak in utilization to be around Labor Day this year.

FMX Newswire

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Bentek Energy

• Power Burn Analytic Report – Power Burn Up from Weekend.
• Supply Demand Balance Analytic Report – Dry Production Holds at 62.3 Bcf/d.
• Texas Observer – EPA Rule Could Raise Texas’ Gas Burn for Power by Nearly 1.0 Bcf/d.
• Industrial End Users Analytic Report – Demand Flattens Over the Weekend.

Platts

• It's never easy on the island of Cyprus, and natural gas may be the next source of tension.
• ConocoPhillips China has restarted production at some Bohai Bay wells at the Penglai 19-3 oil field after the state suspended them in July.
• Global financial markets gyrations affect crude oil and product prices.
• Offshore drilling contractor Transocean, ill-fated owner of the rig at BP's Macondo well, has bid $1.43 bil for Norway's Aker Drilling.

Bloomberg

• Crude Oil Futures Decline Before Data on U.S. Housing, European Economy.
• Japan Prepares for Its First Import of Radioactive Waste Since Earthquake.
• New Nigeria Finance Minister Vows Tight Budget Amid Slump in Oil Revenue.
• Hong Kong Recession Risk Is Global Warning, Most Accurate Forecaster Says.

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