Financial Options

Drivers shouldn't get excited by the news of another week of increased oil inventories or the Congressional action to stop filling the Strategic Petroleum Reserve (though that was clearly a small, helpful move). The Congressional action will potentially mean about 70,000 barrels a day of extra oil on the market, less than the typical week-to-week fluctuation in imports. The increase in oil inventories this week was smaller than the last two, which made no difference in oil prices, and was almost entirely driven by increases in propane and distillate fuels (mostly diesel fuel in this season). Gasoline inventories actually dropped by 1.7 million barrels and crude oil inventories only rose by 200,000 barrels.

Here's an interesting point of reference for what the 200,000 barrel rise means - refinery inputs rose by 405,000 barrels of crude oil per day to a daily level of 15.1 million barrels and refineries were still operating at only 86.6% of capacity. The increase in distillate fuels is good news for truck drivers and should push diesel prices back toward parity with gas prices, especially if gas prices rise further. Gas futures have risen since the report was released and stand at $3.185/gallon.

US Petroleum Supplies and Refining At a Glance

• Total Petroleum Inventories: Up 5.0 million barrels
• Crude Oil Inventories: Up 200,000 barrels
• Gasoline Inventories: Down 1.7 million barrels
• Distillate Fuels Inventories: Up 1.4 million barrels
• Propane/propylene inventories: Up 1.5 million barrels
• Refinery Crude Inputs: 15.1 million barrels/day
• Change: up 405,000 barrels/day
• Refinery Activity: 86.6%

US Petroleum Demand At a Glance
Compared to Same 4-Week Period Last Year

• Total Products Supplied: Down 0.3%
• Gasoline: Down 0.2%
• Distillate Fuel: Up 0.8%
• Jet Fuel: Down 5.3%

This Week in Petroleum took a look at the decline in heating oil use with the headline «Going the Way of the Typewriter? » Outside the Northeast, heating oil use has dwindled to nearly zero and even in the Northeast, heating oil accounts for well under half of home heating.

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With exports falling by $6.1 billion in March, hitting at one strong spot in the American economy, Import/Export Prices (Tuesday) and the International Capital report (Thursday) deserve extra attention this week. Since imports fell by more than exports, further dampening the US trade deficit and total trade volume, the import/export price relationship will be doubly important – an indicator of potential inflation and an indicator of potential narrowing or widening of the trade gap.

Other important inflation indicators are also due out this week including the Consumer Price Indexes (Wednesday) – the big headline retail price inflation indicator. Less watched but perhaps just as important will be the capacity utilization figure, a single line in the Federal Reserve's industrial production report (Thursday). Cap utilization above the long run average is an important indicator of inflation potential and a moderate capacity utilization has been one of the factors allowing the Fed to feel good about a large and rapid reduction in interest rates. The other big factor has been that the rate reductions haven't produced much monetary inflation. In fact, money supply week to week has been as likely to shrink as grow, putting the Thursday money supply reports back in the spotlight.

The end of the week brings two housing market figures where I'm taking a somewhat contrarian view. The misnamed Housing Market Index, which actually measures the sentiment, perhaps the foolhardiness, of the nation's homebuilders is due out Thursday. It's twin indicator, the Commerce Department's Housing Starts report is due out Friday. Better builder sentiment and more housing starts right now, with an 11-month supply of new homes on the market and a recent blip down in the sales trend could turn a reasonable and needed cooling off in housing markets into the real disaster that actually hasn't happened yet. Let builder sentiment stay low, marginal builders stay on the sidelines and some of this inventory sell off. If builder sentiment picks up appreciably anytime before the end of the year, the negative implications would be as important as the positive.

*See more information on the Financial Roadmap series here. Earnings reports are companies of interest, NOT recommendations.

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Oil markets are cockeyed again this week, apparently driven by a Goldman-Sachs prediction of $150-200/barrel oil ahead. Wednesday, the fundamentals were thoroughly lined up in a favor of a price drop - a third week of US oil inventory increases and a strengthening dollar. Geopolitical factors are no worse than any time in the last three years and demand is little changed. Production is growing, though production is Russia is growing slower than expected following de facto re-nationalization of the oil industry. Still oil markets pushed ahead Wednesday to a second day of record highs and are still higher in overnight trading. Investors may want to ask three questions and research the answers:

1. Has Goldman Sachs profited from the runup in commodities as large investments flowed from stocks to this supposed «safe haven»?
2. Is Goldman Sachs now in the classic Ponzi operator position, needing to encourage more investment in commodities to bail out its earlier clients?
3. When will the pyramid collapse?

US Petroleum Supplies and Refining At a Glance

• Total Petroleum Inventories: Up 5.5 million barrels
• Crude Oil Inventories: Up 5.7 million barrels
• Gasoline Inventories: Up 0.8 million barrels
• Distillate Fuels Inventories: Down 100,000 barrels
• Propane/propylene inventories: Up 1.3 million barrels
• Refinery Crude Inputs: 14.7 million barrels/day
• Change: Down 99,000 barrels/day
• Refinery Activity: 85.0%

US Petroleum Demand At a Glance
Compared to Same 4-Week Period Last Year

• Total Products Supplied: Up 0.1%
• Gasoline: Up 0.3%
• Distillate Fuel: Down 0.5%
• Jet Fuel: Down 5.8%

This Week in Petroleum looks at another reason for the runup in gas prices, aside from the increase in crude oil prices. The EPA requires that starting May 1 «summer gasoline» with lower vapor pressures be sold:

Gasoline with lower vapor pressure is generally more expensive to produce. For example, one method refiners use to reduce vapor pressure is to reduce the volume of normal butane, a liquefied petroleum gas with high vapor pressure, that is blended into gasoline. During the month of April, the spot (wholesale) price of normal butane on the U.S. Gulf Coast was about $1.88 per gallon while the spot price of conventional gasoline was $2.80 per gallon. Removing low-cost high-vapor pressure components from gasoline increases the average cost of gasoline. Estimating the increase in cost to produce summer-grade gasoline is difficult. However, just looking at the 5 cents per gallon difference between the recent spot prices of 7.8 Rvp and 9.0 Rvp conventional gasoline on the Gulf Coast tells us that it is significant.

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Things will be a little less exciting for investors this week, at least in the field of economic news. With the Fed meeting behind us and with it what's likely the last interest rate cut of the cycle, unless things deteriorate badly over the next few months, we are firmly in the territory where the stock market should be treating good news as good news and bad news as bad news. Not exactly a bull market, especially given some continuing bearish conditions in the wider economy, but at least a relatively predictable place where companies that beat earnings expectations see share prices rise, for example.

Monday's release of the Nonmanufacturing Report on Business from the Institute for Supply Management is worth keeping an eye on. The nonmanufacturing report has been a bit weak the last couple of months, while employment in nonmanufacturing business has continued to grow (offsetting the weakness in manufacturing). Positive growth in nonmanufacturing business should help keep some strength in the job market in the months ahead, while weakness is going to eventually show in higher unemployment figures.

Wednesday brings three indicators, none likely to be earth shattering, but all important. The Productivity and Costs release is important as productivity growth has been one of the factors mitigating inflation as prices are under pressure from easy money and high commodity prices. The Pending Home Sales figure is the main housing indicator due out this week and needs to be added to the data as we continue looking for any signs of a solid trend forming. The Consumer Credit release from the Fed is this week's first look at consumer behavior, followed Friday by the RBG Cash Index.

Thursday will bring three headline events and one for the green eyeshades. The Wholesale Trade Report is one of those monthly reports that the serious investor or forecaster plugs into his homework. The headline events are monetary policy announcements from the European Central Bank and the Bank of England, and the Treasury auction of 30-year bonds – all three with big implications especially for Forex markets and indirectly for other markets. The 30-year bond had been retired from the Treasury arsenal during the brief period of budget surpluses and only made a comeback in the last couple of years. Demand for the long bond can reveal a lot about the big investors outlook for long term trends, especially inflation.

*See more information on the Financial Roadmap series here. Earnings reports are companies of interest, NOT recommendations.

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Tourists and the tourism industry shouldn't take too much comfort from the reported increase in petroleum inventories Wednesday. While total petroleum inventories rose by 8.9 million barrels with increases in crude oil, distillate fuels and propane/propylene inventories, total gasoline inventories dropped by 1.5 million barrels. Finished gasoline did increase, but blending component inventories dropped, putting pressure on those finished gasoline inventories in coming weeks as summer vacation season winds up.

Refinery inputs were down to 14.7 million barrels per day, down 79,000 barrels/day, as refineries operated at 85.4% of capacity. Gasoline production was up to nearly 9 million barrels per day. Good news for truckers and anyone who buys anything that arrived on a truck (that would be - YOU) as distillate fuel production was also up.

US Petroleum Supplies and Refining At a Glance

• Total Petroleum Inventories: Up 8.9 million barrels
• Crude Oil Inventories: Up 3.8 million barrels
• Gasoline Inventories: Down 1.5 million barrels
• Distillate Fuels Inventories: Up 1.1 million barrels
• Propane/propylene inventories: Up 900,000 million barrels
• Refinery Crude Inputs: 14.7 million barrels/day
• Change: Down 79,000 barrels/day
• Refinery Activity: 85.4%

US Petroleum Demand At a Glance
Compared to Same 4-Week Period Last Year

• Total Products Supplied: Up 0.5%
• Gasoline: Up 0.4%
• Distillate Fuel: Up 0.7%
• Jet Fuel: Down 4.2%

This Week in Petroleum offers some insight into the high cost of diesel fuel that had truckers protesting earlier in the week:

Unlike gasoline, distillate has maintained a high price margin relative to crude oil so far this year. While distillate stocks are now near the bottom of the 5-year average range, they were near the top of the average range at the beginning of February. So why have distillate wholesale prices been so high relative to crude oil for most of the winter? The answer lies in world distillate markets which have been unusually tight this year, placing extra pressure on U.S. diesel and heating oil prices over and above the high price of crude oil. High exports of distillate in January and February to help meet unusual needs in Latin American and Europe contributed to the drawdown.

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