Sylvanus

Oil Price Rise: Demand - Supply - Speculation

On Jun 08 10:28 AM Sylvanus wrote:

> All oil is not the same. WTI (West Texas Intermdiate) is a light
> sweet crude oil. This is ideal for producing gasoline. It is easy
> to refine. Heavy sour crudes are less desirable, few refineries
> in the world are able to handle them and produce high grade, less
> polluting products. Just as Anthracite coal (almost gone) and low
> sulfur coals command a premium price over lignite (low grade coal),
> crude oil such as WTI, North Sea, Tapis, and Nigerian crudes set
> the benchmark and heavy crudes (Saudi and Iranian for example are
> discounted at a lower price.
>
> The refineries problems include fouling of the heat exchangers, additional
> unit operations (hydrotreatment) to remove sulfur components, cracking,
> and alkylation. All of which add to both the capital costs and the cost
> of refining to produce high quality products. These also increase the
> maintenance costs and mean additional downtime (reducing capacity utilization). <br/>
>
>
> Stringent environmental requirements, such as in California mean
> that Asian and European products can not be imported. Due to Diesel
> demand in Europe there is no surplus production. Heating oil in
> the northeastern US, has a higher sulfur content than what is allowed
> in diesel fuel. No new refinery has been built in the US during
> the past 30 years. Any wonder that fuel supplies at the pump cost
> more.
>
> Speculation has been blamed for the rise in fuel prices, but hedging
> activities in the futures markets are used to lock in low prices
> for organizations such as airlines. British Airways reported a profit
> of 1.5 billion dollars this year. But now expects to pay an additional
> 2.0 Billion dollars in the coming year despite hedging. The oil
> futures market is in Contango, which means oil contracts for 6 months
> and longer are priced higher then the current spot prices (physical
> oil for immediate delivery). Hence hedging has been made more difficult.
>
>
> Oil consumption is directly correlated with real growth in a country's
> GDP. World oil supply has not increased over the last three years,
> but the World total GDP has been increasing 3% per year.
>
> Oil is also priced in dollars and dollars are necessary to buy oil,
> the so-called Petrodollars. OPEC countries and Sovereign Wealth
> funds have been and are recycling petrodollars. trade surpluses,
> etc. for US Assets, such as US treasuries, CitiGroup, CDO s, CDS.
>
> Rockefeller Center, ..., Lehman Bros. and Bear Stearns, thereby propping
> up the US dollar. The ultimate cause of the weak dollar is US debt
> (now equivalent to 160% of US GDP) and the Federal reserve policies
> increasing the money supply.
>
> On the fundamentals, increasing demand, and slowly declining supply,
> oil will be more costly. To think otherwise, is merely wishful thinking.
>
>
>

Oil Price Rise: Demand - Supply - Speculation

Dear Sir,

All oil is not the same. WTI (West Texas Intermdiate) is a light sweet crude oil. This is ideal for producing gasoline. It is easy to refine. Heavy sour crudes are less desirable, few refineries in the world are able to handle them and produce high grade, less polluting products. Just as Anthracite coal (almost gone) and low sulfur coals command a premium price over lignite (low grade coal), crude oil such as WTI, North Sea, Tapis, and Nigerian crudes set the benchmark and heavy crudes (Saudi and Iranian for example are discounted at a lower price.

The refineries problems include fouling of the heat exchangers, additional unit operations (hydrotreatment) to remove sulfur components, cracking, and alkylation. All of which add to the cost of refining to produce high quality products. These also increase the maintenance costs and mean additional downtime (reducing capacity utilization).


Stringent environmental requirements, such as in California mean that Asian and European products can not be imported. Due to Diesel demand in Europe there is no surplus production. Heating oil in the northeastern US, has a higher sulfur content than what is allowed in diesel fuel. No new refinery has been built in the US during the past 30 years. Any wonder that fuel supplies at the pump cost more.

Speculation has been blamed for the rise in fuel prices, but hedging activities in the futures markets are used to lock in low prices for organizations such as airlines. British Airways reported a profit of 1.5 billion dollars this year. But now expects to pay an additional 2.0 Billion dollars in the coming year despite hedging. The oil futures market is in Contango, which means oil contracts for 6 months and longer are priced higher then the current spot prices (physical oil for immediate delivery). Hence hedging has been made more difficult.

Oil consumption is directly correlated with real growth in a country's GDP. World oil supply has not increased over the last three years, but the World total GDP has been increasing 3% per year.

Oil is also priced in dollars and dollars are necessary to buy oil, the so-called Petrodollars. OPEC countries and Sovereign Wealth funds have been and are recycling petrodollars. trade surpluses, etc. for US Assets, such as US treasuries, CitiGroup, CDO s, CDS.
Rockefeller Center, ..., Lehman Bros. and Bear Stearns, thereby propping up the US dollar. The ultimate cause of the weak dollar is US debt (now equivalent to 160% of US GDP) and the Federal reserve policies increasing the money supply.

On the fundamentals, increasing demand, and slowly declining supply, oil will be more costly. To think otherwise, is merely wishful thinking.

Best regards,

Publius