Obviously, more of these large gasoline drawdowns will not be good. The graph below from the EIA says it all. If refinery utilization does increase, a new problem will become evident: while gasoline inventories may not fall to critical levels (although supply will be tight), there might be a shortfall of crude oil! The current low utilization creates a big illusion. Domestic production is down from 2005, of course, but imports are too. This is not a one or two week problem; this has been the case for some time. In fact, the four-week average shows that the problem is continuing to get worse. We would easily see large drawdowns of crude oil if adequate amounts of finished products were being produced! 2 million barrel weekly increases in crude supply are not impressive when gasoline and distillate supply tumble as they have been tumbling.
I think crude oil will test $70 per barrel in the near-term. $70 might serve as a psychological level, so whether there is a further rally depends on whether the $70 level is convincingly broken. If the test of $70 fails, we might see a substantial correction in April or May. However, it will be short-lived. I think we’ll see $80 per barrel before the end of the year. $100 is possible, but it would take a major disruption.
Gasoline will reach $3 per gallon by Memorial Day, if not much earlier than that. This summer, it could get as high as $3.50. $4 is not unrealistic, but if it occurs, it will be sporadic. If a major hurricane hits a refining area, all bets are off.
