This spells bad news for crude oil in the short term, analysts predict. If gasoline demand truly has weakened, this might have little effect on gas prices, but might be signaling recessionary effects ongoing in the economy.
$this->bbcode_second_pass_quote('', 'O')il Poised for Quarterly Drop as Price Gap to Gasoline Widens
By Mark Shenk
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Oct. 8 (Bloomberg) -- The widening gap between crude oil and the relatively low price of gasoline is signaling the first quarterly decline in oil prices in a year.
While oil has fallen in the fourth quarter during 13 of the past 20 years because of the transition from peak summer demand, the pressure for another drop in the months ahead is the most intense since 2004 and may defer any rebound to record crude prices until the first half of 2008.
Citigroup Inc., Deutsche Bank AG and HSBC Holdings Plc anticipate oil will slide from last month's record $83.90 a barrel as gasoline sales weaken to the lowest level this year and a slowing U.S. economy curbs demand. Profits from making fuels are so low that refiners have 12.5 percent of capacity off line, the second-highest rate of the past two decades for this time of year, data from the U.S. Department of Energy show.
"Refinery profit margins are being squeezed at a time when significant maintenance is scheduled,'' said Tim Evans, an energy analyst with Citigroup Global Markets Inc. in New York. ``The combination of these factors should send crude oil lower.''
...
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Refining capacity reduced 12.5% as margins drop
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Refining capacity reduced 12.5% as margins drop
by emersonbiggins » Mon 08 Oct 2007, 00:35:52
"It's called the American Dream because you'd have to be asleep to believe it."
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Re: Refining capacity reduced 12.5% as margins drop
by DantesPeak » Mon 08 Oct 2007, 01:11:45
The Bloomberg article quotes some analysts that earlier this year never expected the price of oil to exceed $70, let alone $80.
It is also very biased on talking aout demand side only, and contains some inaccuracies - such as gasoline demand hasn't slipped below last year's levels "in years". Week to week demand is hard to predict, and it's not even clear that EIA weekly figures are 100% reliable - as any errors are made up in subsequent weeks and prior weeks are not corrected.
While refinery profit margins on gasoline have dropped, margins on diesel and heating oil have moved up - and profit margins are higher than estimated in the article.
Anyway demand could still drop - but supply could drop faster. As we approach minimum operations levels for gasoline, diesel, or heating oil, it would only take the slighest problem to force up oil prices again.
It is also very biased on talking aout demand side only, and contains some inaccuracies - such as gasoline demand hasn't slipped below last year's levels "in years". Week to week demand is hard to predict, and it's not even clear that EIA weekly figures are 100% reliable - as any errors are made up in subsequent weeks and prior weeks are not corrected.
While refinery profit margins on gasoline have dropped, margins on diesel and heating oil have moved up - and profit margins are higher than estimated in the article.
Anyway demand could still drop - but supply could drop faster. As we approach minimum operations levels for gasoline, diesel, or heating oil, it would only take the slighest problem to force up oil prices again.
It's already over, now it's just a matter of adjusting.
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Re: Refining capacity reduced 12.5% as margins drop
by emersonbiggins » Mon 08 Oct 2007, 01:46:38
Yeah, Bloomberg is one of the worst when it comes to quoting analysts toiling in wishful thinking, but I thought the 12.5% capacity drop note was interesting. Do you think that number is legit, DP?
"It's called the American Dream because you'd have to be asleep to believe it."
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Re: Refining capacity reduced 12.5% as margins drop
by pup55 » Mon 08 Oct 2007, 03:34:41
$this->bbcode_second_pass_quote('', 'P')rofits from making fuels are so low that refiners have 12.5 percent of capacity off line
The frequent viewers of PO.com well know that this decrease in refinery utilization is mainly due to the refinery problems caused by deferred maintenance after the hurricanes in 2005, as well as the lower throughputs caused by heavier crudes.
Also, the frequent viewers of PO.com well know that the greatly diminished capacity of two giant BP refineries in Whiting and Texas City are primarily responsible for this, and these are the poster children for deferred maintenance and inability to use heavy crude.
However, we also well know that BP would be making more money if these plants were up and running at full speed, even at the low refinery margins. They would be delighted to let the market work to let their competitors, with higher-cost operations, shut down instead.
It is also true that the price of crude oil is a bit overheated at this point for a variety of reasons.
The point is, it is just as likely that when demand picks up in a couple of weeks, the price of unleaded and distillates will catch up to the crude oil price. The little calculation we did last week suggests that the unleaded price is about 20 cents lower than it should be with the prevailing price of crude oil. Even more likely, the crude oil price will back off a little, and the unleaded price will increase a little, to arrive at some middle ground.
$this->bbcode_second_pass_quote('', '"')Refinery profit margins are being squeezed at a time when significant maintenance is scheduled,'' said Tim Evans, an energy analyst with Citigroup Global Markets Inc. in New York
Tim Evans should well know that the inventory situation in unleaded is such that if a lot of these people decide to shut down this fall and take their downtime, all of the pressure on unleaded pricing will be on the upside until equilibrium is restored.
These guys should also know that the refinery margins were at record levels as recently as last summer, so they should not give anyone the idea that the current pricing regime is permanent.
So, as a piece of informative journalism, this article is really not very good, and would be much better written with a little longer time frame in mind, and a better understanding of what is going on in refining at the moment.
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Re: Refining capacity reduced 12.5% as margins drop
by DantesPeak » Mon 08 Oct 2007, 10:30:01
$this->bbcode_second_pass_quote('emersonbiggins', 'Y')eah, Bloomberg is one of the worst when it comes to quoting analysts toiling in wishful thinking, but I thought the 12.5% capacity drop note was interesting. Do you think that number is legit, DP?
As far as I know, there is no (zero) refinery maintenence of that 12.5% now is progress that is not necessary or normal.
So pup55's explanation is correct and well put.
It's already over, now it's just a matter of adjusting.
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