Wednesday, October 31, 2007

I don't believe the hype a.k.a. Reasoning for record setting petro

Something I came across at NPR (looking for more info on the last post).

Over the last year I've become tone deaf to the arguments for why oil has hit a new record high. There are plenty of great reasons to explain it convincingly without having to dust off a new theory. Regardless I still couldn't help but read a recent story about why.

According to the AP via NPR the explanation for record oil prices is traders reacting to low stocks of petroleum crude. What I wonder (and I am uneducated in this) is what is the effect of crude lacking in the U.S. overall?

My Opinion:

As the world keeps expanding its refinery capacity the west coast in particular should be seeing wider supplies of refined finished products shipped to market. Our energy needs will grow with GDP, our refinery capacity is not keeping pace - doesn't take a genius to see where the arbitrage opportunity is. In fact I've been told by multiple industry insiders that Asian firms and brokers moving product from Asia are fighting to find tankage to enter markets throughout the U.S..

In the mid-90's the major oil players consolidated with sub $10 a barrel oil. This leaves huge amounts of room for many new players today in the world of $90+ oil. With crack spreads (the value for refining product) fattening out with oil prices the economics of supplying the U.S. change a bit. Specifically it removes a great deal of pressure off of the U.S. refiners (and therefore crude inventories) as the world steps up and takes advantage of the larger crack spreads to be had in U.S. markets.

We are in a world market for energy. China's refineries, Korea's refineries, Canada's refineries, Russia's refineries, India's refineries etc.... might as well be considered our refineries as well. No different than t-shirt and gym sock factories just larger dollars and volumes. I don't have an immediate number but I've read plenty of stories of large investments in foreign refinery capacity. World wide refinery capacity is up not down.

I've read and seen alot about the pinch in refining in the U.S. Being here in Portland, Oregon (without refineries only storage terminals) I see the real influence on markets in a world economy not being refining but storage. We could double refining within the U.S. but without tanks to keep the product in it means nothing. I have yet to see a technology that fits more gallons into the same volumetric space (other than higher Btu content of a fuel and with cleaner diesel fuel Btu's drop not increase - so even less energy is stored in the same tanks).

Over the last decade the world has seen a housing boom. Newer, larger, ever growing cities are popping up all over the U.S. Being as I've never heard a word about new terminals being built to serve these newer cities I would expect refineries and U.S. crude inventories to have less of an impact.

In short, I think the argument that traders are influencing high prices is hard to believe. Traders are reacting to market prices. Their influence may be on day of a trend. Traders are not the trend setters though. Markets are.

There is a great many other factors influencing price all of which influence traders and distill down to an assumption about inventories, costs, supplies, and ultimately prices.

As a non-expert applying just common sense I would expect U.S. crude inventories to continue to decline. This will happen as increasing foreign refinery capacity becomes available. It will happen as lower cost markets produce finished products in newer facilities and ship it to wealthier high value energy markets. Just like gym socks, t-shirts, and baseball caps.

Just my thoughts.

1 comment:

Brad said...

Well put. There is obviously a ton of factors that ultimately drive market prices. My random thoughts are:

A barrel of Crude will provide a certain amount of GDP. We have been fortunate to be acquiring our crude at very low price per BTU. That is changing. If you think about the alternate sources of energy and their ease of acquisition (Bio Diesel, Ethanol, Wind, Solar, etc.) then you can see that although they have the name ‘alternative’, they are anything but a true alternative. (Think of Pepsi vs. Coke, if Coke rose to 10 bucks per 12pk, Pepsi sales will immediately increase). It will take years and years, perhaps decades, to provide a true Crude Oil substitute. In the meantime, we are at the mercy of the almighty Crude Oil form of the BTU. Since crude Is the most plentiful, efficient and available resource for, at least at the moment, it should rise to the point of parity with the true cost, both economic and opportunistic, of the alternatives. Unfortunately, at this time, that number is limitless.

I do agree that traders are not the trend setters, (oil products traders respond, but don’t generally lead). In light of our current situation, the influence of Billions, if not Trillions of dollars from Hedge funds will continue to drive the prices to where they likely should be. We shall see…..

To anyone who doesn’t concur with my price assessments, ask what it would take to push your car down the road one mile. What would it be worth? I have pushed my car (in high school and college) many times, it is heavy and very tiring. 3 bucks to hurl it down the street for 20 miles is a bargain. What if it were 5 bucks per gallon? 10? I would still pay……

I am just glad the price is moving relatively slowly. I don’t think it will stay high forever, just until the supply/balance demand balances. Ultimately, the real culprit isn’t the relative high price of oil, it is the relative low price of all other products. We are spoiled.

Give me a call and we can discuss further. Happy Halloween!!!!