Market Report: Refiners, Oil Bears Squeezed by Falling Dollar

No Mas, refiners wave the white flag as the Energy Information Agency reported that US refinery runs have plunged 10% to 80.5 percent. That puts refinery runs below the five year average of 81.4 percent causing a steep drop in gasoline and drop in distillates setting off a firestorm of buying in the petroleum complex. Keep in mind that that this is a five year average that includes two major hurricane related shut-downs. In other words, refiners are running as if they were hit by a hurricane and if you look at their margins for profit for doing business they kind of were. His was the the third lowest run rate of the last 10 years, excluding 2005 and 2002.

Refining profit margins have fallen 83% in the last nine weeks a drop that has refiners just shutting down. If you can't make a profit making a product why bother. And what is more it is likely that if demand and margins do not pick up soon we could see further cuts in runs and also in supply. The cuts supported crude as the market thinks that refiners will focus on only the highest yielding crude oil not wasting effort on the lower yielding stuff.

Things are bad for the industry as they are being hurt by a weak dollar and weak demand. The EIA says that earnings of oil and natural gas producers, refiner/marketers and oil field companies fell sharply in the second quarter 2009 from the second quarter of 2008, continuing the trend towards lower profitability evident during the first quarter. These results are drawn from quarterly EIA reporting on the financial performance of energy companies that together represent about half of U.S. oil and gas production and the majority of U.S. refining. The EIA says that on data available at the time of the publication of the quarterly reports, crude oil prices paid by U.S. refiners averaged $57.50 per barrel in Q209, down by more than half from the peak average of $118.16 per barrel recorded in Q208. Natural gas wellhead prices averaged $3.44 per thousand cubic feet (Mcf) in Q209, compared to a peak average of $10.05/Mcf in Q208.

This means oil bears like me have to say NO MAS as well. Oil has finally has broken out of the high set last June and the high I projected when the Fed went to quantitative easing last March. Forget the fact that gasoline inventories are 4.3 percent above the five-year average for the period and demand is weak it is narrower than the 6.9 percent surplus we had the prior week. Forget that gasoline demand fell 13,000 barrels from the prior week to 9.26 million barrels a day. The Market is only focused on the bullish like stockpiles of distillates, including heating oil and diesel falling 1.08 million barrels to 170.1 million and not the fact that supply is 30 percent above the five-year average Right now we have to respect the range. The market has finally broken out as the weak dollar and better economic data transcends oversupply on the perception that supplies will tighten more. Those fears were increased as OIL Movements reported that OPEC would reduce oil shipments and Nigerian Rebels say they will start hostilities again after accepting amnesty a few weeks ago.

The dynamic has changed as the relentlessly falling dollar has squeezed the refiners and the oil bears as well.