So, how do I – an Energy Analyst – predict petroleum prices?
It is a rarity indeed when I feel the need to plead guilty to an over-exertion of negative enthusiasm (which is really a long definition of criticism) when I look back on several Weekly Energy Reports where I have torpedoed investment bank energy “experts” in general, and Goldman Sachs, in particular. If I were you or Goldman Sachs, the recipient of these smirk-full barbs, I would ask, “So how would you, oh GG (Great Grinch, or is it Governor Grinch!), forecast petroleum related prices over the short-term or long-term?”
That is a very good question.
First of all, let’s forget about “long-term,” which I consider anything further forward than a two-month period, which may be a disconcerting statement for those attempting to scribe an annual budget.
Second, I disregard anything that is not immediately verifiable, or any information that is from dubious sources. The epitome of unreliable “factonia” would be any utterance from a politician whose only interest is how much more tax they can milk from the energy cow. Next, it is with a jaundiced eye that I look at the media whose financial Holy Grail is its readers, viewers, or listeners who, in turn, generate advertising dollars.
So how do I, as an energy analyst, see through all of this camouflage?
Short-term forecasting should be based on supply and demand data, as we show in every Weekly Energy Report.
Looking at this week’s EIA based data, we see that crude inventories dropped by 4.2 million bbls. So what? Well, the immediate reaction of the speculators is to boost the futures price of crude, but if you look at the increase in gasoline inventories, they increased by 2.0 million bbls so more crude was being refined to produce more gasoline!
As it stands, and with the driving season to begin tomorrow, gasoline inventories in all five U.S. supply districts are at least 8% higher than a year ago and well above the 5-year average. Even though distillate inventories fell by almost 1 million bbls, it is gasoline inventories that drive prices at this time of year while in the winter months, distillates set the pricing tone.
The next thing to look at is refinery utilization numbers, which nationally in the U.S. are at 89% of capacity. The key areas to look at however are in the East, Gulf Coast, and Midwest refinery runs, which are at 92% of capacity. This tells me that from a supply standpoint there are no immediate short-term, or dare I say, medium-term supply problems, so my call would be for stable, if not lower gasoline prices over the short-term.
As you can see, my forecast is based on today’s hard numbers. The speculators and financial energy experts apparently don’t find this logic very spicy so they throw doubt factors at the consumer/investor, like guessing at the outcome of the June 2nd OPEC meeting.
Petroleum forecasts leave us with all kinds of questions they profess to have the answers to, but not one of us know in advance, questions like:
· Will there be freeze or thaw in oil production?
· Will prices then increase or decrease….pant, pant?
· Will the problems in the oil sands with the wild fires create a cutoff of supply to the Midwest refineries, which maybe, just maybe would then increase rack prices?
· The Gulf Coast hasn’t experienced a hurricane in 127 months! Is the time nigh for a disaster and a massive refinery shutdown?
· But what if the sky crashes and cracks open on the ground all around us?
It could you know…couldn’t it?
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