Crude Oil at $122 Is Good News for Refiners

Oil prices fell below $122 a barrel “on expectations that the surge in energy prices is depressing U.S. gasoline demand”. What the oil bulls don’t tell you, of course, is that a bubble asset like oil is most popular when it goes up and produces risk-free gains. An asset that drops $30 in 2 weeks is not risk-free. Hence, it seems less attractive. Investors get cold feet. If they don’t bail… they may well stop putting more money at risk.

We had started to predict a drop in oil prices several weeks ago. In fact, the invitation to join our new premium service Hot Stock Confidential was based on the analysis of money flows, as hedgefunds and industry insiders began to divert large streams of cash into U.S. refinery stocks.

Accordingly, refiners Valero (VLO) — up 3-plus %, Sunoco (SUN) — up 7-plus %, Holly (HOC) — up 5-plus %, are all in the green.  If predictions of OPEC’s president come to pass, we could see oil back at $70.

Our own speculation on falling oil prices involves a U.S. refiner that not only has been artificially depressed by mishaps earlier this year… but has just added dramatically to its overall capacity.

Some analysts still predict that oil could trade at $175—or even $225—by December.  But insiders and hedge funds are betting serious money on falling prices.

Comments

[Vox Rationalis:]

Crude at $122 is good for refiners. But what about crude at $127? The refiners took off yesterday while oil spiked. Where's the discussion of this?

Refiners do not react inversely to crude prices alone. The low gasoline inventory report yesterday was a big catalyst in this market.

2008 Jul 31 08:21 AM

[User 235997:]

You realize margins have actually shrank since we have taken 20 percent off the price of crude? The fallacy the author and many others have fallen into is thinking that lower oil = better margins. That is not necessarily true at all. Take a look at margins when oil was trading around $10 a barrel and you will see what I mean. Margins are bad because there is a lack of oil and a glut of refined products....no other reason than that.

2008 Aug 01 09:19 AM

[NOWHEREMAN:]

Ethanol is a substitute for gasoline that requires no refining. For refiners to increase their margins, Ethanol has to be treated as an clean air additive or go up enough in price to offset the current differential in refining.

2008 Aug 01 09:52 AM

[zawy:]

VLO used to trade right with the price of oil. As oil went up, VLO went up twice as fast as its margin increased. Then above somewhere between 90 and 110, VLO started trading inversely. I don't get it.

2008 Aug 01 11:27 AM

[Shaggieman:]

VLO is barely squeaking by and said at earnings conference call "they'll shut down before they lose money refining" or words to that effect. It's going to be interesting as CVX just reported a loss of 25 cents due to poor refinery margins. Seems like the refineries are refining too much product for their own good. No one should be required to give their product away while the public perception is exactly reversed that they're being ripped off. Go figure!

2008 Aug 01 09:31 PM

[Kunst:]

Blah blah blah blah.

2008 Aug 02 12:03 AM

[jjason:]

Crude oil at $60.00 is good for the US economy.

Go to:

www.stopoilspeculation...?

To help stop speculation in oil futures.

And if you do not believe that speculators are the problem, sign the petition and if Congress acts and prices go down then you will know that there was manipulation of oil prices.

2008 Aug 03 02:47 PM