Oil Price Differentials
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Posted 22 June 2012 - 12:51 AM
The big story in the global oil supply picture is that Saudi Arabia will (supposedly) provide full volumes in July. China is taking a lot of this, presumably in exchange for cutting off Iran. China may also be putting this oil into strategic reserves while prices are down. This is the quid pro quo that Hilary arranged to get Chinese defacto cooperation. Meanwhile Iran’s oil put is badly swooning. The 64k question is what does Iran do about this?Back in the US, the Memorial Day driving season is over, and we have a snapshot of the US consumer. The results are sluggish, resulting in more YoY gas demand declines. The crazy aunt in the attic that nobody seems to want to mention is that Americans are steadily dropping into poverty, and poor people don’t drive as much. That’s the real story when you hear the spin about how lower gasoline prices helps consumers. It is necessary to connect the dots about why gasoline demand is so punky. If you answered, more poor people, you get the prize.The US has a well developed pipeline and energy infrastructure. The problem is that right now it is in the wrong places. The country’s oil infrastructure is built primarily around refining imported oil and then moving refined products – gasoline and diesel and the like – north, from the Gulf Coast to the Midwest, or inland.The issue in North America is that growing oil production is landlocked and tied up in the interior and growth is coming from two prime sources: the Bakken shale in North Dakota and the Canadian oil sands. There is 600,000 bpd coming out of Bakken. Oil from the Bakken is generally mid-weight and fairly sweet. This heads for Cushing, where regional refineries are designed to handle sweet oil.Expensive to produce oil sands from Canada is heavy, and needs to reach the refineries in the Gulf which have been retrofitted to handle heavy oil. Unfortunately this heavy oil is being dead-ended at Cushing, and that is why we see oil inventories piling up there and thus the price discount for WTI oil.The Seaway pipeline which used to move refined products north from the Gulf Coast but has now been flipped to carry oil south. This will move some 150,000 barrels of heavy oil a day out of Cushing; and volumes are expected to rise through the year to reach 400,000 bpd by early 2013. The Keystone XL southern line will not be finished until the end of 2013. Therefore heavy oil will continue to pile up at Cushing. In the process this oil loses its fungibility, and WTI prices are pressured. As this plays out oil-sands mines require a price of around US$80 per barrel to break even. Obviously unless Canada can figure out a fast way to get this oil out to western terminals and out to Asia, this source of oil is in big trouble. This solution is years away.The next chart shows that Saudi Arabia and Qatar’s severe pain threshold is about $80 Brent Sea oil, which makes the most recent price breaks important to watch. The severe pain threshold on Canadian oil sands is about $80 WTI, a level already reached. Pain threshold on Bakken is closer to $60 WTI, and on Eagle Rock perhaps $50 WTI as a general rule. I will follow with more discussion of how Bakken, Eagle Rock and the Gulf of Mexico play out in a poor fungiability oil market. Be very careful about just trading oil price based indexes and futures, there are lots of strategic considerations (including non-fungiability) to consider, which is my task at hand.I have some subscribers set up to go on Ditto trade. I set my account up as a margin account, not because I will borrow on margin, but because that’s what is required for short sales. You might be delayed if you set up a cash account, but I was told by Ditto trade that they can override this. Let me know if this is a problem. Right now I am waiting for whites of eyes before trading, so there still may be about a week before I launch this. Let me know if you are in the pipeline getting set up: [email protected] and I will to accommodate as best I can.
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