refinery capacity and oil price

Discussion in 'Energy Futures' started by paradox, Jun 20, 2005.

  1. paradox

    paradox

    Ok, so the analysts are saying a large part of the rise in oil is due to lack of refinery capacity.

    But shouldn't a lack of refining capacity reduce the demand for oil, and hence the price of oil?

    I don't get it...
     
  2. shortage of ref. capacity makes distilate prices rise, so the value of the distilates in a barrel of oil rises concurrently...

    it's a symbiotic relationship.............
     
  3. silk

    silk

    I don't understand that.


    If half the refineries in USA blew up tomorrow. Price of gasoilne and distilates would skyrocket.

    But why would crude oil go up? There would be shortage of refined products but tons of oil on market. Right??
     
  4. 2 barrels of gasoline can be distilled from 5 barrels of crude...give or take...........

    the rest is middle distallates such as heating oil, jet fuel, and diesel fuel......

    as the components of crude rise in price, so does the inherent value of a barrel crude oil.....

    OPEC is correctly stating that you could fill the Atlantic ocean with crude oil, but if you can't refine it, there is a glut of crude on the market and the price of crude should drop since refiners still can't refine it quick enough to soak up that supply..............

    the arbs in the market are more than willing to jump on any crude price drop to arb the spread since at some point in the future, that barrel of oil will eventually be refined.....

    there are times when refiners are down for maintainence where the price of crude will drop slightly, but that doesn't last long in this environment..........

    if 10% of the refineries were disabled, it wouldn't be too long before you couldn't buy gasoline at any price since supply in storage would be quickly drawn down........and futures markets are all about securing supply several months out which nowadays is more uncertain than ever.....

    the deeper meaning in all of this is AL Qaeda may be ready to start playing with fire crackers again and oil infrastructure may be on the list..........

    uncertainty, Osama, Iraq, Nigeria all add up to no one wanting to go short ...as you well know......
     
  5. silk

    silk

    I still don't get it. I understand that refining margins would increase. And the remaining refineries would be willing then to pay more for crude oil. But that still wouldn't necessary keep price from falling if there was far more oil on market than the remaining refineries could process.

    It would simply mean windfall profits for the remaining refineries. But I don't think it would mean oil price would go up.


    In the extreme example that every refinery but one was blown up. Price of gasoline and distilates would basically go to $50,000/gallon. But the price of crude would go to 5 cents. Because every producer of crude would have more oil than they could store. With only 1 refinery to sell to.
     
  6. in the extreme, that may happen,...it would depend on where the supply disruption occurred ....upstream of the refinery or at the refinery........

    if all the airlines had to stay on the ground due to some "event", the price of jet fuel would drop and that may have some effect on crude price....but if people can't fly, they drive, so the rise in gasoline demand may offset the effect of jet fuel price drops...
     
  7. mhashe

    mhashe



    Analogy: There is a massive supply of wheat, and more massive amounts being harvested. Lets say a new govt. regulation shuts down 50% of the bakeries. Therefore we can reasonably expect that since less wheat is being processed to make bread, the price of wheat should actually *go down* and the price of bread should *go up*.

    I've learnt that the market is not always right because it operates on emotions. I suspect even after pricing in "un-forseen" events, a lot of the crude price rally is due to an abundance of new specs/ hedge funds moving into the energy markets.
     
  8. tomcole

    tomcole

    Its also a question of what type of crude and who can process it. You're confusing a specific traded crude with what actually is sold to refiners. Most refineries can only process specific types of crude, its not all fungible.

    You may also want to throw in Venezueal as a wild card - lots of our gasoline comes from there.
     
  9. lay on the prediction of 15 named tropical storms and hurricanes slogging thru the Gulf.........remember Ivan took out a lot of production last year
     
  10. To elaborate on Tomcole's point: The benchmark oil futures are light sweet crude. The excess supply from the Middle East is in heavy sour crude. The spread between light and heavy crude has widened sharply as it became apparent that the Saudis could no longer meet market demand for light crude. They'll pump as much oil as you want but it'll be the heavy stuff, which the rest of the world has inadequate capacity to refine. If you blow up refineries, heavy oil may get cheaper but light oil will get more expensive. Light oil is the benchmark price everyone is talking about nowadays.

    http://www.mcdep.com/MR41228.pdf

    Martin
     
    #10     Jun 20, 2005