China Demand - Boom:BUST ? /Inventory & Sour Crude/Refining Myth's.
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Heavy Sour Crude & Refining Capacity Myths:
One of the significant mistakes Oil Analysts are making is they are asserting we are at max refining capacity.
- that is WRONG.
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eia.doe.gov
Analysts are making inappropriate comparisons of Global Oil Demand & Refining Capacity.
Oil Demand is also met by Nat Gas liquids and other Hydrocarbons & oxygenates that do not depend on refineries.
How can we test the world refining capacity limit theory?
There are several ways.
Did we see dramatic imbalances and price surges?
In the past decade, refinery utilization in the U.S. and Europe has been high. Occasionally, surges in demand have exceeded supply for short periods (1-2 months). During these times, inventories dropped much more rapidly than normal. During such times, product prices spiked relative to crude oil prices. That did not occur in 2004.
Light product inventories (gasoline and distillate) in the U.S., Europe, and OECD Asia started 2004 at the lower end of their typical ranges, but no significant draw down occurred relative to normal seasonal changes. That is, production of light products from refineries kept up with rising demand.
Were there any signs that incremental heavy crude oil production was not used?
As OPEC increased production of heavy sour crude oil, there was no indication that this incremental production was not sold or that refiners were unable to process it. Refinery input rose, and product demand was met.
Finally, was world refining capacity running at maximum utilization: The next several slides will look at refinery capacity utilization in 2004 to explore any indications that world utilization was at its maximum levels
eia.doe.gov
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In real supply:demand shocks - Inventories dropped rapidly and product prices ramped in relation to crude prices.
This is not happening.
eia.doe.gov
eia.doe.gov
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CHINA: <not all it seems to be...>
stratfor.biz
[" U.S. interest rates already are the highest out of the three major economies, and the Federal Reserve has made no secret of its intention of pushing them higher still despite inflation's being in check. As the gap widens, money will flow into the United States as investors take advantage of the disparity. The result will be a rising dollar. Do not expect a quick rise, however. Many oil producers and central banks are quietly changing their dollars into other currencies because of the U.S. currency's weakness. The dollar is turning the corner, but it took these oil players more than two years to begin abandoning the dollar; their return need not be appreciably faster even if the incentive to leave begins to diminish.
The net result of a strengthening dollar will be accelerating inflation in any country that does not actively link its currency to the dollar whether with a peg or through currency manipulation. Nearly all oil contracts are denominated in dollars even if the crude is produced, transported and consumed entirely in the Eastern Hemisphere. That fact has reduced the negative effects of oil's recent march upward. As the dollar strengthens, exports from nondollar-linked economies will strengthen as well. But improved export activity will come at a crippling cost as the relative weight of oil erodes purchasing power and boosts inflation.
Rising U.S. interest rates will have one additional notable effect. China's development model, like those of much of Asia before it, depends on maintaining cash flow. So long as credit is cheap, debts can be rolled over and profitability does not matter. However, the Chinese economy has become overdependent on international capital markets during the past year, with most of corporate China's new debt being short-term in nature.
Such debt is extremely vulnerable to interest rate hikes. As rates rise, that debt will become impossible to maintain, and China will face the beginnings of a financial crisis. Given the makeup of the Chinese financial system, such a development is unavoidable. The only questions regarding the crisis to come are time frame and severity.
Such a crisis will dramatically affect demand for oil. Current oil consumption in China is at about 6.5 million barrels per day (bpd) to 7 million bpd of crude, half of which is imported. However, that oil is almost exclusively used by the country's industrial sector -- whereas coal is used to produce nearly all of the country's electricity. An economic collapse triggered by problems in the country's industrial sector would hit oil demand disproportionately hard.
How fast and far China will fall is an open question. But one thing is certain: China is huge, and when it falls, it will not fall alone. The result of even a mild recession could knock 1 million bpd of consumption off the top in just China, and a deep grinding collapse could possibly eliminate Chinese imports altogether. Such a development would dramatically diminish international crude oil prices.
In 1997, the Asian financial crisis knocked out 6 million bpd of demand; prices fell by nearly three-quarters as a result. "]
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re: China
morganstanley.com
<partial excerpt - link above for full article>
["...If the Chinese economy is already slowing and the government wants it slow further, then what’s going on in commodity markets?
Two possibilities come to mind -- the first being a resurgence of non-Chinese global growth. Unexpected weakness in Japan and Germany -- the second and third largest economies in the world -- argue against that possibility. Nor does America hold the answer. While the US economy has been firmer than expected in early 2005, it has not accelerated relative to the vigorous 4.4% GDP increase posted in 2004. Which takes us to the second possibility -- a speculative commodity play by financial investors. Morgan Stanley research suggests that the hedge fund community has not unwound the major long position it established in commodity markets in 2003 (see Hernando Cortina’s 8 March 2005 research note, “What Are Macro Hedge Funds Doing?”). Consequently, to the extent there has been a decoupling between commodity prices and Chinese industrial production growth -- and that there is no new candidate that fills the global growth void -- the role of financial speculation emerges as a prime suspect.
If that conclusion is correct, a further slowing in Chinese industrial production growth -- consistent with both the fragmented data flow of early 2005 as well as the intent of the Chinese leadership -
- could catch commodity speculators leaning the wrong way...."]
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Crude Oil & Natural Gas Inventories continue to hold above 5 year averages.
- This inventory rise does not exist in any other commodity ramping in price.
How can there be a "Demand Driven" Shock...when Inventory Levels show the opposite to be true ?
...Shock, or Speculation !?!
$#o~n&l!y+p$r%o$m~i+s=k@n@o=w^s+$
When, not if....tic' toc`
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