If you’ve read this blog before, you will recognize that yours truly is fond of horse racing metaphors.
The oil market ran like Mr. Ed on Monday, crumbling under the pressure of weekend Saudi comments that indicated the Kingdom was quite happy with crude oil prices just above $50 bbl. But Tuesday, crude oil prices soared, as word leaked out that Saudi Arabia was cutting precisely 158,000 b/d of its crude oil output, effective February 1. Ultimately, Mr. Ed ran like Secretariat yesterday and the market registered its largest gains since last Summer.
Traders and analysts with vested interests will pronounce this move as a turning point. I won’t and will remind everyone that I have no vested interest, other than the emotional tendency to pray that the outlooks I have posted prove to be prescient.
Even though the Saudi cut is small, I wouldn’t be surprised to see some pundits note that a single degree in temperature can make the difference between water and steam (you’ve seen those motivational corporate presentations that beat this metaphor to a pulp, I’ll bet).
But that analogy would be misguided in this case - - the Saudi cut amounts to less than 0.18% of global crude oil production, and ongoing refinery maintenance assures that there will be plenty of crude through mid-March.
And one quick footnote: Oil prices rose nearly $3 bbl for crude and 8-9cts gal for gasoline, heating oil, and diesel yesterday, but oil was in the slow lane when compared with natural gas. Spot values for natural gas surged 11.5 percent - - if oil had matched that gain, we would be looking at $61 bbl crude this morning, and be talking about a one day spike of about 17cts gal for gasoline and diesel. Manic behavior in the natural gas pit can make the oil sector look downright pastoral.
Ships Passing in the Wind . . .
Wholesale prices have moved almost due north, and retail prices have drifted listlessly, or in the case of my own home state of New Jersey, caught up to some of the wholesale declines witnessed in late December through January 15 (The prevailing price locally here is now $1.99 gal!)
I doubt whether any newspapers will be doing stories on runaway retail profits through the rest of the Winter. Thanks to yesterday’s spectacular gains of nearly 9cts gal in the gasoline futures’ market, distributors from Maine to Florida and west to the Pacific Coast find invoices that include price increases of 7-10cts gal. If they were lucky, they were operating on gross profits of 12-18cts gal in recent days. So thanks to yesterday’s gasoline futures market, many retail stations have seen their gross profits plunge by 40-80 percent in less than 24 hours. Making a buck on gasoline on the street is a tough business, particularly in midwinter.
Most of the Midwestern street prices in the $1.80-$1.99 gal have disappeared in the last five days. This hasn’t occurred because of some whimsical choice among retailers - - the wholesale price in Great Lakes’ markets, for example, is now about 40cts gal higher than it stood on the Martin Luther King holiday.
Other wholesale markets have yielded gasoline bounces of 20-30cts gal. I suspect that a sloppy track with lots of turns and congestion will prevail well into February, so I don’t believe this is the beginning of a stretch run for oil and gasoline prices. The fast track comes in March, April, and May.
We start today with crude oil prices just shy of $57 bbl, up $7.10 bbl from the twenty month low reached less than two weeks ago. That one day visit to $49.90 bbl looks more and more like a freakish event, but I wouldn’t yet prepare for a $60-$70 bbl crude backdrop.
More Refinery Deals Coming Soon
Monday brought the official announcement that Tesoro would be buying Shell’s 97,000 b/d Wilmington, California refinery, as well as some 150 Shell stations and 140 USA Petroleum retail sites for just over $1.6-billion. If you are a reader of our Oil Express newsletter, you didn’t need to wait for the press release- - we published the story on Friday morning.
More refinery mergers, acquisitions and sales are forthcoming. Several weeks ago, we beat all of the financial wire services and journals, when we reported that ConocoPhillips would be selling its Irish (Whitegate) refinery. We also exclusively reported that Valero had enlisted investment brokers at DeutscheBank to find a buyer for its Lima, Ohio refinery. We believe that Valero will announce this intended sale tomorrow when it comments on fourth quarter earnings. We also believe that Shell, Valero, and ConocoPhillips, and some major oil companies, have other refining assets on the block.
A future column will comment more as to who are the likely buyers and who are the likely sellers. But we’ve crossed a threshold. The refinery “land grab” that lasted from 2001-2006 is over. Now, many of those same companies who gobbled up assets are looking to digest and cull. They will choose which units past muster and are worthy of multi-billion dollar investments, and which ones might be better disposed of at presently high valuations.