Energy Prices Fall, But Supply Gaps "Remain Cavernous"
However, Paul Hornell with Barclays Capital Inc., London, said, "The supply-side deficits in the US oil product market remain cavernous, with demand effects dwarfed by the size of the product gaps."
In an Oct. 5 report, Hornell said: "The cumulative loss of crude oil output due to Katrina and Rita is now close to 50 million bbl and is likely ultimately to extend beyond 100 million bbl. We now expect the cumulative level of forgone refinery output to close in on 200 million bbl, with the cumulative reduction in gasoline output alone now expected to stretch towards 100 million bbl. The hit to the supply side is very significant, including the lowest US crude oil production for over 60 years, very low refinery runs, and a [year-over-year] reduction of over 1 million b/d in gasoline output. US oil inventories fell by 8.8 million bbl relative to their normal seasonal pattern in the latest week, taking oil product inventories below their 5-year average level. All that, and the greater part of the disruption to oil products supply is not yet in the data."
He concluded, "Given that toll of supply-side trouble, together with the even more alarming tightness in natural gas, one might then wonder as to why the fast money has been so quick to sell the energy complex. The reason is demand pessimism, based on some confusions about relative magnitudes and some overly downbeat views on the US economy. In reality, demand is not close to compensating for the supply-side deficits."