Crude Oil Pummeled Again

Commercial crude inventories excluding the strategic petroleum reserve now lie at 296 million barrels. While this is below the five-year average, it is almost exactly in line with average inventory levels before Hurricane Katrina knocked out a large chunk of domestic refinery capacity in August 2005.

Motor gasoline stores are currently in the middle of the average range for this time of year, and distillate fuel stocks are now above the five-year average range for this time of year.

The sub-300 million barrel crude inventory number has been relentlessly used by oil traders and analysts to argue that oil supplies in the U.S. are "tight" and therefore undervalued.

However, Jim Williams, energy economist at WTRG Economics, says that the figure is actually being misused as a measure of the supply/demand equilibrium.

"It seems like anybody [who] talks about crude oil these days [is] putting their understanding of economics on hold," Williams said in an interview. "Crude oil acts like any other product in any other market. If a company's feedstock prices are high, that company will maintain the minimum level of that feedstock in inventory to satisfy their customers' demand. Oil is a primary feedstock for a huge swath of the U.S. economy. That is why crude oil inventories are low now -- not because of an immediate oil shortage."

Once Wednesday trading on the Nymex ceased and the smoke cleared, August WTI had fallen 7.3% from its Monday settlement price -- an enormous two-day move for West Texas crude, even within the context of the maniacally volatile price trajectory that the contract has followed during the last two years.