Crude is high but supply will persevere By Melvin Schebaum

Summer has come and gone. Despite early speculation that there wouldn’t be enough gasoline for the driving season, supplies were adequate.
At the beginning of summer demand for gasoline was expected to be strong, but supplies were about 5 million barrels below the average of the previous 5 years. Refineries were faced with a carryover of work required for compliance with new sulfur regulations for both gasoline and diesel fuel. Then, problems with refineries in Texas and Oklahoma and a complete loss of production from the refinery in Coffeyville, Kan., directly affected our market area. As projected, demand through the summer was heavy, and the season ended with total U.S. inventories 8.3 percent below last year and 4.8 percent below the last 3-year average.

The price of crude oil reached a new all-time high of almost $80 per barrel. In spite of the adequate supply of crude, strong worldwide demand, along with a tightened supply from OPEC countries, kept some strength in the market.

The world economy continues to put pressure on supplies of crude oil. World oil consumption grew at a very moderate rate of 700,000 barrels per day in the first half of 2007, but is expected to grow 1.8 million barrels per day in the last half of the year. The greatest growth is expected in China, the U.S. and the Middle East.

Where will the supply to meet these additional demands come from? OPEC has expressed reluctance to increase production, insisting limited world refining capacity, not a shortage of crude oil, is causing high prices. So all 2008 production increases will be coming from non-OPEC countries, whose production is projected to increase by 1.1 million barrels per day. United States production of crude should be up 300,000 barrels per day. As a result, if production doesn’t keep up with the expected growth of demand, higher prices probably will be around for awhile.

The diesel fuel situation is very difficult. Diesel inventory also is significantly less than last year’s levels, and there already have been significant terminal outages.

Because refineries have been on maximum capacity to keep up with the demand for gasoline, diesel inventory is going into fall about 6 percent below last year and below the 3-year average. Some Midwest refineries will be down for maintenance several weeks this fall, which will put significant pressure on supplies. These low inventory conditions will leave the market susceptible to unexpected supply disruptions.

Customers who were able to take advantage of early programs to lock diesel prices for the fall should have good values for harvest fuel needs. It appears, however, that those who didn’t lock in a price will pay more than last year for fall harvest fuel.

This year, propane supplies are the lowest since 1999, but it is not too late to build inventory with imports that could be drawn in by high prices being paid for wholesale product. Fortunately, inventory in the Midwest is not as low as in other parts of the country, but several things could affect fall supply:

• The amount of propane used for grain drying (demand in northern and eastern areas can draw away significant amounts of propane).
• Propane that is pulled from the Midwest and carried or piped to other markets.
• Reduced imports from Canada.

It appears there will not be any major price relief for propane until we see what the weather does in December and January. If history is any indicator, propane price could come down if winter does not come early, if grain drying is not a big event and if oil prices come down going into winter. I would suggest you don’t wait for that to happen. Keep your propane tank full.

This year’s market volatility was unprecedented. And that has been a challenge for the energy business. Historically, high price disparities occurred because gulf refinery production, which arrives on the east side of the state, was priced differently than production in the Midwest, where there are fewer refineries.

For this reason, if there is any reduced production in the mid-continent, it is immediately felt in the marketplace. Since much of the pricing was based on the supply point, gasoline prices varied widely in from town to town. Although most marketers did all they could to get supplies from lower-priced markets, all are faced with limitations: transportation, allocation of products based on historical liftings plus relationships with established suppliers.

As prices come down from the harvest rush and there’s a lull before the next crisis, take time to look at your supply needs for next year and lock in some of the prices. The current projection for next year is $71.25 per barrel crude compared to this year’s projection of $67.60 per barrel. It appears energy will continue to average higher due to reasons we’ve all heard before: crude is high priced and refining is at a premium because of high demand, all of which add up to higher energy costs for driving, farming and heating your home. 

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