This is the final segment in a three part series discussing the recent past and future of oil prices and the reasons why prices are where they are. Currently there is a glut in oil inventories worldwide. There are a number of factors contributing to this continuing situation as I have detailed in there previous two segments of this series but in the end it can all be summed up into one simple statement: All parties whether they are individuals, corporations, or nations tend to do what is in their own best interest.

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The current market is not ideal for producers although as evidenced by the number of companies entering the market it is not nearly as dire as OPEC or other parties suggest. Nevertheless relatively cheap oil is good for many parties, including of course refiners.

Top analysts have been calling for refiners to pullback on production which would add to already high inventory levels. The rational behind this call to slow down production is essentially “don’t flood the marker now you will regret it later”. This approach may favor analysts looking for the market to move but whats good for the market isn’t always good for the refiner.

Refining margins have been on the rise since last November but it is more likely than not that this trend has peaked for the year at levels slightly below those seen last year. This means the best thing refiners do for themselves is churn out more products. After all, producing more product than are needed now and having excess inventory is certainly preferable for the refiner than scrambling later to produce enough products to meet demand when margins are lower.

The market for refined products is undeniably saturated. European gasoline which had strengthened in anticipation of increased demand from the summer driving season in the U.S. but has fallen back in the face of unexpectedly weak U.S. demand. This lower pricing is worldwide with gasoline cracks in Asia hitting a seasonal peak of $10 a barrel as compared to last years high of $12 a barrel in late March.

In China ongoing work on refineries could diminish the country’s total exports. However, given the size and rate at which the Chinese export market is expanding (as of February up 67% year over year) the increased domestic usage will be negligible. The rest of the region has strong inventories as well with Japan and South Korea and Singapore reporting large stockpiles on-hand and officials don’t anticipate significant changes in inventory levels in the next six months.

In the United States product stocks are falling but this is likely a seasonal drop rather than a structural one and this drop is from very high levels. Gasoline stocks in the U.S. were at record levels in February of this year and are currently nearly 7% above their five year averages. Atlantic Coast stocks and ultra low diesel stocks were at record highs this winter and remain 62% above their five year averages. Similarly, the Gulf Coast stocks have fallen from high levels but are still 13% above their five-year average.

With stockpiles around the world at these levels the obvious question is why are refiners continuing to produce? The answer is of course that they are still making money churning out products due to the price of crude. It is only logical that refiners will continue to do what is in their own best interest. This glut of products on the market is a substantial obstacle to prices rising in the near future.

While producers plan cuts production levels in order to raise prices this strategy has not been proving effective. This is due to other self interested producers eagerly snatching up any slack left in the market. One example of this is China which received a record 4.83 million barrels per day in March from OPEC. While Saudi barrels were down, imports from OPEC members Angola, Kuwait and Venezuela all picked up the slack.

The market today is setup so a lack of production from one area is quickly replaced by other producers. While predicting the future is a good way to make God laugh it seems the market is setup for oil prices to remain near current levels in the immediate future. This is unlikely to change barring some drastic alteration in geopolitical realities or a shift in market demand. This shift could come on as a result of greatly increased demand from growing economies and drastic changes in technology or a substantial reduction in global production capacity.