Oil Speculation Reaches All Time Highs As Gasoline Supply Rises to 18-Year High

This is an update to the previous post Oil speculation far exceeds the levels reached in 2008. Yesterday, we said that the most important thing to remember is that You can speculate all you want, but at some point the fundamentals have to line up with the speculation. It looks like fundamentals are far worse that what I first believed, as gasoline supplies are reaching an 18 year high.:

Feb. 8 (Bloomberg) -- U.S. gasoline stockpiles probably climbed last week to the highest level in almost 18 years as demand from motorists declined, a Bloomberg News survey showed.

Supplies of the motor fuel increased 2.6 million barrels, or 1.1 percent, in the seven days ended Feb. 4 from 236.2 million a week earlier, according to the median of 16 analyst estimates before an Energy Department report tomorrow. The projected advance would leave inventories at the highest level since Feb. 26, 1993. All of the respondents forecast a gain.

Gasoline stockpiles have climbed in 10 of the past 11 weekly reports from the department as refinery output outpaced demand. The crack spread, or profit for processing three barrels of oil into two of gasoline and one of heating oil, rose to a 43-month high. Consumption fell to an 11-month low.

“Weak demand fundamentals and rising output have increased gasoline stocks,” said Stephen Schork, president of Schork Group Inc., a consulting company in Villanova, Pennsylvania. “The crack margin makes it attractive for refiners to produce fuel. There seems to be a disconnect between the crack and the demand numbers.”

Crude oil stockpiles climbed 2 million barrels, or 0.6 percent, from 343.2 million the previous week, the survey showed. It would be the fourth straight weekly advance. Fifteen analysts gave crude forecasts and all projected an increase.

Gasoline for March delivery rose 4.37 cents, or 1.8 percent, to settle at $2.4942 a gallon on the New York Mercantile Exchange. Crude declined 54 cents, or 0.6 percent, to $86.94 a barrel.

The crack spread surged 12 percent to $21.209 a barrel at 3:47 p.m. today based on New York futures prices, the highest level since July 11, 2007.

“The crack spread is high despite astonishingly high inventories,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “Prices are seemingly bulletproof because of the flow of cash into the energy market. This has changed the way the crack works, removing that discipline from the market.”

Hedge funds and other large speculators increased net-long positions, or wagers on rising crude-oil prices, by 17 percent in the seven days ended Feb. 1, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report on Feb. 4. It was the largest gain since the week ended Dec. 7. Bullish or net-long bets on gasoline prices rose 5.8 percent to 65,331 futures and options combined, the data showed.

Regular gasoline at the pump, averaged nationwide, declined 0.5 cent to $3.117 a gallon yesterday, the AAA said on its website. Prices reached $3.124 on Feb. 3, the highest level since Oct. 14, 2008.

“Given where prices are, we may go into the summer with weak demand and extremely high gasoline inventories,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester Massachusetts. “Instead of a pre-summer run-up in prices we could see them weaken significantly.”

Pump prices have climbed in the first two quarters during five of the past six years, according to AAA data.

Gasoline consumption fell 1 percent to 8.55 million barrels a day in the week ended Jan. 28, the lowest amount since the week ended Feb. 12, 2010, department figures show.

Imports of the motor fuel surged 82 percent to 1.17 million barrels a day in the same period, the highest level since August, according to the department. It was the biggest one-week increase since September 2006.

Refineries probably operated at 84.7 percent of capacity, down 0.15 percentage point from the week before, according to the Bloomberg survey. Refiners bolstered operating rates 3.3 percent in the week ended Jan. 28, the biggest one-week gain since Dec. 3.

“Both the supply and demand side are pointing to higher gasoline stocks,” said Jason Schenker, president of Prestige Economics, an energy advisory firm in Austin, Texas. “We’re expecting a very big build because of the big increase in refinery utilization, and demand was weak because the winter weather kept people off the roads.”

A winter storm moved across the U.S. from the Midwest to Maine last week, grounding thousands of flights. Chicago had its third-largest snowfall on record as gusts of 70 miles per hour (113 kilometers per hour) off Lake Michigan closed Lake Shore Drive and stranded hundreds of cars and buses.

Supplies of distillate fuel, a category that includes heating oil and diesel, probably slipped 1 million barrels, or 0.6 percent, from 164.1 million, the inventory survey showed. Twelve of the analysts anticipated a decline, two projected an increase and two said there was no change.