Aggregate US oil inventory rose by 8.9m barrels last week, amongst the largest weekly aggregate increases ever. Gasoline stocks are now at levels not seen in two years, some 10m barrels higher than they were last year. Until now the product overhang has mostly focused on distillates which made sense since they’re a key feedstock for industry, and demand has slumped because of the US recession. Gasoline demand by comparison had remained stable, but not any longer. Crude refined in the US through November and December averaged 637m barrels or 4.4% below a year earlier on DOE data. In total, upwards of 1.7m b/d of demand for crude oil disappeared in Q4 2009 because refiners could not pass on the cost of crude oil to consumers in Europe and North America and had to mothball plants. Meantime, there is no more space for crude to move into the Strategic Reserve (remember George Bush frantically filling those SPR tanks at $130 in mid 2008?)  The SPR is out of the market and the implications are bearish of crude as long as OECD demand remains depressed (and those full tanks should also cushion any Iran related price spike).

Chevron's recent profit warning was instructive on the scale of the crisis in the downstream oil business. The second largest US oil company could not make money refining oil averaging $70. If Chevron can't pass on the cost of $70 oil to struggling US consumers via profitable crack spreads, then why do Goldman Sachs think  that a $90 average this year is rational? Their bull case is based on emerging market demand, but a significant portion of China's record 5m b/d December imports will be re-exported in Q1 as refined products, but to whom exactly?  Over the next 6 months, either crude oil has to correct back towards $60 or US average gasoline prices have to surge well over $3 (from a current $2.75) assuming crude oil stays around current levels. If crude oil heads to $90 or beyond, gasoline has to rise pro-rata. Is that credible with an unprecedented supply glut? Speculators currently own more than twice the storage capacity at the NYMEX Cushing delivery hub for WTI crude. What are they going to do with all this oil, which at some point needs to be physically delivered?