On Wednesday the Energy Information Administration (EIA) reported that crude inventories fell -2.4 million barrels for the second consecutive weekly drop. Gasoline inventories fell by an even sharper -5.5 million barrels. Refinery utilization fell to a 16 year non-hurricane low at 81.4%.
Bad weather in Mexico that closed the ports for 3-days were blamed but in reality that closure came after this inventory was taken. Imports fell only slightly by .033 million barrels per day. This is hardly a Mexican import problem but next week will definitely be a challenge. The drop in inventories is simply a buyer boycott by refiners who can't make any money at the $115 level. They don't want to inventory oil at that price only to get caught in a correction a couple weeks later. They will buy only what is needed until the prices retreat.
The drop in gasoline inventories was the 5th consecutive weekly decline. Gasoline inventories were at 15-year highs just last month. Refiners have no pricing power with that large of an inventory backlog and are shutting down capacity rather than refine crude for a loss. Refiner capacity at 81.4% is unheard of without a hurricane shutdown. For comparison it was 90.4% for the same week in 2007.
If gasoline supplies continue to fall and oil prices rise it is a sure bet we will see $4 gasoline very soon.Jim Brown