Goldman, China, Consumer Sentiment

Jim Brown
 
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The combination of the SEC suit against commodity giant Goldman Sachs, the worry of China putting breaks on its 11.9% growth and a sharp drop in U.S. consumer sentiment combined to push oil and gasoline prices below recent support.

Gasoline prices fell the most in seven weeks as U.S. equities and commodities fell after the Goldman announcement. Gasoline was already in decline after the consumer sentiment report showed April sentiment dropped to a five month low at 69.5. Gasoline fell -4.92 cents or -2.1% to settle at $2.277. That was the largest decline since Feb-25th. For the week prices lost -0.5% after declining -1.5% in the prior week.

Consumer confidence was expected to rise to 75.0 according to the average of 69 economists survey by Bloomberg. Futures also fell the prior day after jobless claims rose to 484,000 and the highest level since Feb 20th. The U.S. economic rebound suddenly seemed far less certain.

Gasoline inventories were 4.7% above the five-year average for the week ended on April 9th. The API released numbers showing that U.S. refineries produced a record amount of gasoline in March, an average of 9.3 mbpd than in any previous month on record. This was a shocking revelation since refinery utilization is only running about 84% during that period. With oil supplies still at very high levels and gasoline being produced in record amounts prior to the actual driving season that suggests we are going to be flooded with gasoline this summer.

The API estimated there was another 13% of refining capacity that could be brought online to produce gasoline and while crack spreads are high now they would collapse if that capacity was brought online. There is definitely no fundamental reason for oil to be $85 or for gasoline to be nearing $3.

With jobless claims rising that assumes there is no solid recovery in jobs. Without putting the 16 million people back to work there will be a shortage of demand recovery until well into 2011. Demand for distillates, including heating oil, jet fuel and diesel fell to the lowest point since January 1st last week.

With 20,000 flights per day canceled due to the Iceland volcano the amount of available distillates is going to soar. 20,000 flights use an unimaginable amount of jet fuel. This week long lockdown is going to cause refiners to run out of storage space and drastically cut back on their runs. This will increase the amount of oil in inventory on a daily basis until the flights restart.

China was the ultimate good news, bad news story on Thursday. They announced GDP grew by 11.9% in Q1 and everyone cheered. Before the echoes of that cheer faded away Asian stocks were being sold on the worry that China would have to put the brakes on the economy to keep it from overheating. With China the second largest oil consumer this pressured crude prices before the Goldman news.

A new version of the Cap and Tax climate bill is due to be released on April 26th. The new bill is reportedly being drawn up by John Kerry, Lindsey Graham and Joseph Lieberman. The bill will target current tax breaks for oil and gas companies and propose additional taxes on those companies as well as on anyone who produces smokestack emissions of carbon. Obama is trying hard to get as many programs passed as possible before the midterm elections robs him of his majority. Getting a new tax bill passed in this political climate is going to be an uphill battle.

Democrats looking for ways to fund another jobs bill have also taken aim at oil and gas companies and the tax breaks they currently enjoy. It seems the people in power still don't understand that peak oil is coming and they should be encouraging oil and gas companies to explore rather than penalizing them. The easiest way to create jobs is to authorize additional drilling in areas not currently permitted.

Exxon Mobil has completed the longest extended-reach well drilled from an existing offshore fixed platform. The Santa Ynez unit, Heritage platform, offshore southern California, drilled a well that extends more than six miles horizontally and more than 7,000 feet deep. Exxon said experience learned from Russia'a Sakhalin Island gas project helped them complete the well. The Santa Ynez unit has produced more than 450 million barrels of oil since 1981.

Jim Brown

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