Ike vs. Refining Capacity and Oil Price

It should once again be an interesting week for crude oil. It appears that Hurricane Ike shut down 19 percent of refining capacity, causing analysts to predict that gasoline may once again rise to $4 per gallon on average if the outages start to approach a month or longer (see Bloomberg article). While some refineries escaped damage, extensive power outages and closed transportation and shipping lines will make it difficult to return to normal operations quickly.

While gasoline prices were on the rise late last week, the effect on crude oil was a little less certain. On Friday, as the storm was still in the gulf, crude oil traded below $100 a barrel for a short time before finally closing above $102 a barrel. Crude oil has recently been looking for reasons to go down as it has sold off after reaching prices in the $140s just a few months ago. Whether the current disruptions in the gulf and the recent breaking and bouncing of crude oil prices off the psychological barrier of $100 will help to reverse the slide in crude oil (which has been selling-off even on good news) should become a little more clear as the week progresses.

Rumors of funds liquidating various commodity positions, aided by speculators now taking short positions (see previous post), have been given as reasons for the recent slide in crude oil and commodities in general. This week may give an indication of how strong the selling is, and whether some funds will take any run-ups in crude prices as an opportunity to sell into strength. Taking some production off-line, even a small amount, should help to signal the current level of strength of the crude oil market. If this current development is shaken off in short order, crude oil bears may in fact see the $80 a barrel price they have been predicting. This week should provide a little more clarity, but then again, with crude oil this seems to be a popular refrain.

Comments

[dlaw:]

"Bouncing"? "off" $100?

Possibly you didn't catch the London open.

2008 Sep 15 12:48 AM

[petervankan:]

So what you're saying is, basically: we don't know if prices will go up or down.
Gee.

2008 Sep 15 08:03 AM

[john s. gordon:]

why is it that everybody puts all their refining facility eggs in 1 basket?
> jack

2008 Sep 15 08:24 AM

[unfaire:]

When harricanes come, refineries shut down. That means they are not using crude. The demand for crude goes down temporarily and, of course, it creates a short term over supply. Crude price falls. It is as simple as that.

2008 Sep 15 08:35 AM

[bowman711:]

The report isn't out yet for last week, but I got the numbers for the most current period oil report (Sept 5):

The percent utilization of operable refinery capacity - 78.21% - down 10.41%
US crude oil stockpiles fell by 5.8 million barrels
Gasoline stockpiles fell by 6.4 million barrels
Distillate stockpiles fell by 1.25 million barrels
Gasoline stockpiles down 3.7 million barrels
ULS diesel stockpiles (<15 PPM Sulfur) fell by 1.1 million barrels
Kerosene-type jet fuel down 2.3 million barrels

& Heating oil stockpiles down 15.7% from year ago

This in the week that OPEC cut production by 500,000 barrels. What did oil do - it went down. I guess it doesn't operate under the laws, or even theories, of basic economics.

Maybe by the time you read this, the new report will be out here: tonto.eia.doe.gov/dnav...

2008 Sep 15 08:41 AM

[john s. gordon:]

opec production cut was trumped by speculators & hedgie funds dumping their positions,
> jack

2008 Sep 15 10:56 AM

[unimpressed...:]

Let us not forget or diminish the impact of the Democrats in Congress running scared and agreeing to drill off shore. When they took their misguided 5-week vacation, they got their butts kicked by their constituents who are beginning to realize that it's not a good idea to elect Democrats to office.

Please note that oil is down $4.49 to $96.69, this morning. It appears that IKE did not effect refining as much as the oil wonks wished it would. And, people are using less and less gasoline and diesel as the gouging by Big Oil continues at the pumps. Are we to go into mourning for EXXON, et al as their quarterly profits plunge? Excuse me while I go into hysterical laughter over their situation.

2008 Sep 15 12:43 PM

[10Q Detective:]

Unimpressed makes a great point--for the last seven years we have been conditioned by big oil that rising gas prices are not their fault: crude goes up, gas price goes up. Now crude drops more than $7.00 in the last three trading days -- yet gas price goes up! Oh, I know, w. refineries down, less available gas. BUT, refineries down represent 20% of total production, what about the other refineries running at less than full capacity?

Exxon did not exit retail gas business because of alleged slim margins -- me thinks left business because of PR associated w. $4.00 gas sign next to ExxonMobil name at pump!

2008 Sep 15 12:56 PM

[mixter:]

Screw the gang of 20 that want to tax oil companies, limit offshore drilling, and generally put government interference in the way of practical problem solving, What does that wimp, Lindsay Graham know about the oil industry, or any thing else for that matter?

For all of you "Big Oil" haters. How come the price of oil has declined over 30% if they have control over the oil prices? The top ten private enterprise oil producing companies only control less that ten percent of the world's oil producing reserves. If they have the ability to still control oil prices with that little leverage, I would like to know their secret.

2008 Sep 15 01:21 PM

[10Q Detective:]

industry.bnet.com/ener.../

2008 Sep 15 02:12 PM

[33Nick:]

What will more drilling do if our refineries are over-taxed? We haven't build any new ones in over three decades.

How about building new refineries before drilling. Let's put the ox in front of the cart first for once.

2008 Sep 15 03:07 PM

[whisperonth...:]

I understand that the refinery problem is causing temporarily higher prices than we should be seeing. I understand that lower oil prices will bring lower gasoline prices. What I don't understand is why those lower prices aren't lower. I read three different current articles today that predict oil prices going to (or close to) $70. They predicted gasoline prices averaging $3.50/gal. nationwide. If oil prices are falling more than 50% from the price that brought us $4 gasoline, why isn't $70 oil bringing us much closer to $2 gasoline? And why are "they" still predicting extremely high heating costs for this winter if the price of oil is supposed to be lower than it has been in a year?

Maybe I'm just missing the point, but if there really is an answer that isn't political, or one that doesn't say "big oil" is keeping its profits, I'd like to hear that answer. Those are the two general theories making the rounds, and it seems to me that neither can actually be 100% true, if they even have a glimmer of truth. But I really would like to understand, in plain English.

2008 Sep 15 09:16 PM

[Daniel Moser:]

I am afraid that you (whisper) are missing the point to some extent. While you are correct that crude and products (gasoline, distillate, etc) do move in tandem to an extent-albeit even a relatively large extent, refinery margins have been terrible in the U.S. because we have a gasoline driven economy. Unfortunately, for whatever reason, the U.S. made a huge bet decades ago to run the economy on gasoline vs. diesel thus we built the infastructure for gasoline.

If gasoline and crude oil followed a more historical path over the last year or so, gasoline would be closer to 4.5-5/gallon. Maybe even higher. Big oil companies are capital constrained like any other industry. Arguably even more so given the fact that they can operate on 10% of the total reserves in the world .

Exxon probably has terrible margins on their retail gas stations relative to E&P. Hence, a capital constrained company sells off their low margin businesses in an effort to invest more heavily in higher margin businesses like more exploration and production.

Within the last 3 years refinery margins were at their peak for both distillate and gasoline production. They put off a lot of maintance work at that time so that they could boost earnings as much as possible. Now they are paying the piper. That is a large reason that refinery utilizations are down so extensively. They are operating with really old facilities and put off maintaining them properly for a few years.

In my opinion, although no one asked, the recent volatility has practically nothing to do with the underlying fundamental picture. Quite frankly this is all about liquidations. I don't pretend to know where the equilibrium price of oil is but I am quite confident oil should not be moving $5 a day and natural gas moving 50 plus cents a day under normal, fundamentally driven circumstances. Don't be too hasty to draw conclusions about the direction of energy prices currently. There is a tremendous amount of noise in the system. This is what happens when you let banks get into the world of energy. This is little more than market contagion spread by the failure of most institutions that used credit to hold assets.

The case winner here is that we need more infastructure (pipelines, refineries, etc). Until that happens energy price volatility will remain tremendously high. Drilling is a moot point if it isn't refined and distributed. Enough Said.

2008 Sep 17 04:05 PM