Valero Energy: The Price of Oil 9 comments
-
Font Size:
-
Print
- TweetThis
Oil peaked at $135 and has since retracted to $122. Many speculators want to know just how low oil can go before resuming its upward trend. Gary Gordon has depicted the oil boom as a hoax; "Now the only thing to keep egging the oil boom on in the near-term is the desire of speculators to make money on the long side."
Aside from refiners, such as Valero Energy Corp. (VLO), who desperately need the price of crude to fall in order to improve margins, the price of oil affects everyone both in the commercial and private realm.
There are three components priced into a barrel of oil;
- Fundamental supply/demand
- Currency devaluation
- Speculation
Using $30 as an arbitrary starting point (based on when the three factors synchronized their upward influence), the total escalation amounted to $105. It is readily easy to calculate the currency devaluation contribution by comparing the price of oil in other currencies. For arguments sake, we will peg this at a third (33%). A more difficult task is calculating the remaining two thirds relevant to fundamentals and speculation. By no means should the following be construed as a scientific analysis, but for the sake of simplicity we will allocate a third to each.
Fundamental Supply and Demand
Until we have a viable substitution for oil that addresses our transportation needs, it is fairly safe to assume that consumption will increase over the long term. Short term, conservation and other various efforts can slow things down a bit, resulting in pockets of reduced demand. Sticker shock at the pump has resulted in both Europeans and Americans changing their consumption habits. This tends to have a short term effect as any reduction in consumption is gradually replaced with new consumption originating from global growth, combined with the natural waning of the initial shock. The price of crude oil eventually continues its upward climb, based on fundamentals.
Currently, we are experiencing a pocket of resistance, contributing to the reduction in consumption. This in turn has resulted in the price at the pump being deflated by at least 8%. Needless to say, the refiners are the ones that are absorbing the difference. From a crude oil standpoint, slightly lower consumption has no effect on the major oil exporting countries as they will gladly lower the flow by 3 to 5% and wait for demand to return.
Conclusion: fundamentals are not currently contributing to lower crude oil prices. This also explains the "Fuel Check" conundrum.
Currency Devaluation
Unless the macro economic picture for the U.S. improves by leaps and bounds, it is highly unlikely that the dollar will appreciate substantially vis-à-vis other G7 currencies. A three percent fluctuation has little effect on crude prices other than to cause the price of crude to fluctuate in tandem.
Conclusion: the dollar may no longer contribute to the upward spiral of crude and is likely to have a stabilizing effect to the tune of three percent. This is approximately $4; resulting in 135 - 4 = 131.
Speculation
Assuming that speculation has contributed a third to the current increase in the price of crude, this being a very big assumption, should this factor be totally removed we would have lower crude prices by about $34. Taking into account the dollar and speculation, the best case scenario for lower oil prices would come in at about 135 less 4 less 34 = 97.
In reality, what we are seeing today is crude in the 122 range as traders are waiting to see what Congress will or will not do. The chances that Congress will remove all speculative contributions in one fell swoop are practically nil.
Wrapping Up
From Valero's (VLO) and other refiners' perspective, this temporary pullback in crude prices is a well timed reprieve. VLO needs crude to stay below 120 for several months in order for it (and others) to raise prices at the pump by 8% by yearend. We could see crude pullback to the $105 level, but that's about as low as it will go for now. The fundamentals and the dollar have not come into play in a meaningful way.
How low it will go now depends on Congress egging* speculators.
Disclosure: No positions.
*I haven't heard the term 'egging' used in decades. Upon reading Gordon's article, I was inspired to write this confutation. Thank you Mr. Gordon.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 9 comments:
The article is about general crude oil pricing, where crack spreads are referred to via final product pricing. The improvement from 12 to 20 is a function of gasoline rising to the $4 level and supplementary increases in heating oil prices.
"Crack spreads" do not exists in a vacuum. They are derived from the spread between cost input and market price product output.
As for VLO, spreads sometimes increase or decrease against market trends due to hedging and other stock cost considerations. Of many, one consideration is the flux for 'sour'; at times below and at times above 'sweet'.
The consumer is unaware of the crack spread. Hence, from the article's perspective, the actual spread does not influence consumption. The final product price does.
Saul Sterman
CrossProfit
Correction: each 1% change in the dollar as measured against a basket of currencies causes oil to correct by $4 in the opposite direction. A three percent dollar appreciation would result in oil coming down by $12 not $4.
CrossProfit
See:
www.time.com/time/maga...
CrossProfit
You should.
Also, Professor Michael Greenberger gave a report to the Senate Committee on June 3, 2008 and you should download that report too. Just follow Anthony Schneider's links.
Speculation in the commodities futures markets has been allowed by the negligence of the Commissioners and the employees at the CFTC. Read the report that the CFTC economist, Jeffrey Harris, gave to the Senate Committee. Harris's report is badly done and he should be fired for it.
The CFTC employes have betrayed the public's trust and I hope you and others on SeekingAlpha help to do something about speculators cheating us.
Why nor take a more analytical approach by first looking at oil appreciation in terms of a basket of currencies, then build real worldwide oil supply and demand curves and use those to estimate price change contribution due to this. The result translated back into $ would give you a much better estimate of the equilibrium price of oil without with speculation factor removed. Yes, it is much more work, but the result will at least be believable...
Point well taken.
The problem is that the 'speculation factor' really is an unknown. In any event, in terms of dollar devaluation, this was taken into account.
In terms of a price equilibrium based on supply and demand, this too is highly speculative based on the fact that the market has been out of sinc since the beginning of the year. If you can find any model/formula that has worked anytime in the past two decades that yields true results today, please let me know. This is indicative of a top (bubble?) or a nasty correction. However, I must caution that few have been able to predict accurately any major correction in the past. Luck is far more the norm than any analysis.
One can do a true analysis ONLY when normal market conditions persist.
Saul Sterman
As an aside, have you noticed how many institutions have sold XOM during the month of May? Last count it was over 850! Now, either they know something that I don't or they are all raising cash for some other reason. I'm still looking into COP and CVX to see if there is a similar trend.