Today’s announcement that the WTI crude would be pumped out of Cushing, OK was the missing piece to a puzzle that has confounded me since early October.
Since all WTI oil is priced at Cushing, the price of WTI is much less affected by the global cause for oil and much more by the localized supply glut that has been a condition of the region for years.
The failure to secure the pipeline out of Cushing was not to limit ConocoPhillips, who has now assured us that they intend to reverse the flow from Cushing and send it further south.
Here, I presume, they will be able to fetch a price much closer to that of Brent crude oil.
Sadly, had I known of this development I would have fled my oil short in quite a hurry. However, not knowing what was afoot I made decisions that are in hindsight obviously deleterious to my wellbeing.
This development is creating a pricing phenomenon; whereas before a localized glut of oil in Cushing was creating an artificially low price, now an anticipated localized drought is driving WTI much higher.
So unfortunately, the price of $102 a barrel for WTI is probably more similar, in conjunction with demand, to what $90 a barrel was. I’d assume some fashion of this approach is being used to get the $110 price target that JPM just set.
This also means it will be much harder for me to make back lost ground.
However, as demand still sucks, the higher price is sure to hit industry, and we have this massive problem ongoing in Europe, I will remain where I am. My losses will not get too much worse than they are now.
I look for crude to break down on further contraction in demand, now that this one off event has been priced in.
If you enjoy the content at iBankCoin, please follow us on Twitter
this stupid oil market just want to fuck with us … I hate when that happens …
this market is on the edge of collapse, turkey God or not …
Cain- I’m really short on time today, but check out these links below. They provide a really good description of the situation. I was right that diesel prices have remained high despite lower priced refined gasoline due to the transportation of goods, but it’s revealed that a good portion of those goods could have been crude. I’ll have to think this through more later, but thought I’d catch you here to give you a chance to ponder also.
http://38.96.246.204/todayinenergy/detail.cfm?id=3930
http://38.96.246.204/todayinenergy/detail.cfm?id=3710
http://www.eia.gov/oog/info/twip/twiparch/110908/twipprint.html
It sounds like the last of the articles is saying that the selloff in oil was almost entirely from WTI – Cushing supply build. Looking at Brent I’d believe that we never should have sold as far as we did.
However, that article also suggests the ability to really move oil out of the region is limited so may ConocoPhillips is bluffing?
COP wants to dump their interest in the Seaway pipeline because they are building their own infrastructure. The time necessary to reverse the flow of the Seaway pipeline compared to their infrastructure coming online favors dumping the interest. Their Eagle Ford pipelines/transportation should be ready to go by mid-2012 whereas the Keystone XL, if approved, wouldn’t be ready until 2013 and the Seaway reversal would take just as long.
Half of refining is done on the Gulf Coast. Other refining is done in the Midwest. The pipelines flow north from the GC to Cushing, Oklahoma. The increased production in the Eagle Ford region which flow North to OK, the Bakkan region (North Dakota) which flows south to OK, and Canada which flows south to OK all created a supply glut at Cushing depressing the price of WTI. All of the Midwest refiners then make amazing margins because it’s physically difficult to transport crude to the Gulf for refining where Louisiana Light Sweet is drilled/stored/refined. Because LLS is linked to the price of Brent, a divergence is created between WTI and LLS/Brent. So as Midwest refiners jump to crack all of the WTI from Cushing, you get increased demand for WTI crude and crack spread compression. I believe the prices of crude will converge as the crack margins compress.
However, in order for the spreads to really converge, they need the infrastructure to open up the raw material to outside of the region. Mid 2012 is months away; so in the meantime, has WTI gone too far?
Will the local refineries keep binging at these rates before the glut is taken off the table, or will they lay off and let WTI dip back down?
It feels like this move is overdone, considering there’s no good way right now for anyone not near Cushing, OK to even get the oil out of there.
Also, the spread converging is one thing, but betting on WTI still has the same risk associated with investing in any of the industrial commodities right now.
Brent crude prices are not exactly ripping. They’ve been much more calm, and are obviously channeling downward.
Unless you use some really fancy options, betting on the convergence of the spread could go horribly wrong if both prices tank.
Agree that the drop in spread (approaching $8) is overdone. But may need Brent to break below its current trading range of $108-116 for WTI to go below $100 (or need WTI to break $100 first and pull Brent below $108 before WTI can really break down).
The Seaway won’t take 1 year to reverse … ENB is expected to add 5 cents/sh in earnings next year from this pipe.
“Enbridge said the project could deliver as much as 150,000 barrels a day by early 2012, with potential capacity of 400,000 barrels.”
“The reversal of the Seaway line would fill the gap created by last week’s federal delay of TransCanada’s (TRP) Keystone XL line, potentially allowing Gulf Coast refiners to cut back imports.”
“It would also effectively connect Canadian tar sands oil producers to Gulf Coast refiners — explaining why the day’s largest gain among industries came from Canadian oil producers, a weak-ranked group with deep ties in the tar sands.”
I don’t necessarily think they need to re-distribute crude between Texas and Oklahoma for different grades of crude to start to converge (not necessarily fully converge yet). My argument was that the Midwest refiner’s demand to crack crude would drive up the price of crude to the extent that cracking it becomes not as profitable. More like a WTI-Brent divergence limiting effect. I guess comparing Midwest refinery utilization rates to crude stocks would confirm this. As utilization increases, crude stocks would decrease to reach a point where they sustain a level at which refining capacity is maxed out. If they went past this point it would compress crack margins more because you would get a maximum point at which you draw crude in WTI and an increase in supply of refined products. Concurrently you have the difficulty of realizing profits from refined products as transportation of them to customers is limited. Therefore, I think you want to balance the amount of crude you draw from Cushing to crack, to the amount of refined product you are capable of transporting for sale from the Midwest, along with the amount of crude you can transport to the Gulf Coast for refining (which depends on the WTI-Brent spread).
Perhaps I’m thinking about this too much from the aspect of a vertically integrated company. The independent refiners only care about buying crude and refining it for a profit. That would lead me to believe the infrastructure scenario much more because as a Midwest refiner you want to capture the crack spread and move your product for sale, either through internal marketing or sale to someone else who will market it for you. Therefore, you would hit a point when you can’t move any more product because your utilization is maxed out and any build in refined products would compress the crack spread further.
Yes, but for the moment the refineries really going to town on the Cushing crude are the same ones that have always had access to it.
If they figure that out and stop worrying about the punch bowl getting taken away, they might hit the brakes a bit.
Yea I was going to include that in my last response. Let’s say they have 7 months or so before pipeline infrastructure begins to come online. In order to game the crack, you need to idle your refineries and allow the drillers to increase production and store at Cushing to create another glut and drive down the price of WTI. I don’t know the landscape in the Midwest as far as downstream (refiners) to those vertically integrated to pure upstream (E&P).
There are a few scenarios:
1). The most beneficial are those vertically integrated who can control supply to Cushing and demand from there. They would want an increase of supply to Cushing to drive down WTI.
2). The refiners idle and lose current crack sales while supply increases at Cushing perhaps widening crack spreads again through the depression of WTI price.
3). The refiners buy crude and compress their crack margins and increase the price of crude up to a point where you reach a capacity whereby you can’t transport anymore and WTI tops out.
4). A type of collusion occurs where the drillers will supply crude to Cushing as long as the refiners keep going. This would have the effect of widening the crack spread once the threshold of the refiners not being able to transport anymore hits and WTI tops out again.
Overall then, I think that the price of WTI has to hit a maximum when the ability to move refined products is hit.
Hence the relevance of the logistics link you posted; if the huge uptick we’ve seen in diesel is from people trying to move Cushing crude out, then how many more trucks do they have to send that way?
it looks like the bulls are trapped and fucked …
Lots more.
We need to consider the players too: upstream (drillers), midstream (transport), and downstream (refiners).
For the upstream, Midwest drillers want to sell crude to higher priced markets but they are ineffective because WTI crude doesn’t flow to the Gulf Coast where profits would be higher. The Midwest drillers need to transport it. The GC drillers on the other hand are annoyed because they have lesser incentive to ship it to lower priced markets and refiners in the GC area have to accept tighter crack margins.
For the midstream, they only care about flow and because the GC drillers have no incentive to flow crude to Cushing, the pipeline owners want to flip the direction.
For the downstream, refiners in the Midwest want cheaper crude so they buy from Cushing. They prefer more supply into WTI because it depresses the prices of WTI and allows them to profit up to the point where they reach operational capacity and transporation of refined product capacity. GC refiners don’t really have an incentive to refine oil because LLS and Brent are more expensive, but they do want WTI crude.
So, the pressure to flip the pipeline is from the Midwest drillers who want to sell higher priced crude, the pipeline guys who can charge for flow, and the downstream refiners on the GC who want the cheaper crude from Cushing. Therefore, depending on WTI-Brent you should see the pipeline guys who flipped do better with the Midwest drillers and GC refiners. If crack spreads widen again before next year AND gasoline transportation hits a bottleneck due to the amount of refined product that can be transported, Midwest refiners take advantage the most again.
Hello, Neat post. There is a problem along with your web site in web explorer, might test this? IE still is the market chief and a huge component to folks will pass over your magnificent writing because of this problem.