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Oil is not a monolithic commodity

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February 25, 2011 – Comments (6)

Most people (and I include myself) tend to lump things in generalities. But as Floridabuilder would say: "It pays to make a few distinctions". Everybody knows that the housing market is 'doomed' (yes I am being tongue in cheek), yet there are smart Chimps who can navigate desirable submarkets, and knows how to value builders who can do the same. Same with zzlangerhans. If anybody can look through a pile of biotechs and pharmas and separate the wheat from the chaff, he can.

And so in that vein, I have been listening to a lot of commentary about potential oil shocks. The question being that if Libya cuts production due to governmental instability, can Saudi Arabia step in with excess capacity and fill the gap? Seems like a reasonable proposition, except it assumes that all oil is the same. And that is most certainly not the case.

Assuming there are instablities and supply disruptions from Libya, this has serious implications for not only oil, but also producers and especially refiners. I am sure that other players (TDRH, Greenmycon [haven't seen him around in awhile though], etc.) can shed more light on this topic than I can. But I think this excerpt from David Rosenberg's morning comment is worth sharing

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https://ems.gluskinsheff.net/Articles/Breakfast_with_Dave_2011_02_25.pdf

....this emerging view that Saudi Arabia can just step in and replace Libyan
oil seems totally off base, as a loyal subscriber informed us yesterday, it is not
so simple. The reason: Libya’s crude is a perfect feed for ultra low sulphur
diesel. The oil Saudi Arabia would supply to replace, it is not. Apparently you
need three barrels of Saudi crude to get the same number of barrels of diesel
you could get from one Libyan barrel. Further, the Saudi crude is very high in
sulphur. The refineries that process the Libyan crude cannot remove the
sulphur. The question is what happens if we lose Libyan crude and if strategic
stocks are not released (1.6 billion barrels I believe) — then $150/bbl is
certainly not out of the question and that is before we start talking about Algeria.

6 Comments – Post Your Own

#1) On February 25, 2011 at 4:13 PM, rfaramir (29.65) wrote:

So, what would this say about refiners, say Valero (VLO), who specialize (or at least can handle) high-sulfur crude?

If Saudi supply steps up (in an attempt to fill in for Libyan crude), regular refiners would still be fighting over reduced sweet crude supplies, raising their costs and hurting their profits, but VLO would be abundantly supplied, and therefore getting lower costs, higher prices, and therefore a higher crack spread and profit.

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#2) On February 25, 2011 at 4:18 PM, binve (< 20) wrote:

rfaramir,

Exactly. Like I mention above, I think this will affect a lot of people/companies, but especially refiners.

And I also agree, Valero stands to do well (potentially) from this, but many other refiners will likely be hurt (WNR, HOC, etc. spring to mind).

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#3) On February 25, 2011 at 4:54 PM, leohaas (36.73) wrote:

The ability to refine lower grades of oil is the core reason to own VLO rather than any other refinery. Excellent work here!

Just one note: "Apparently you need three barrels of Saudi crude to get the same number of barrels of diesel you could get from one Libyan barrel."

This may be true. But that does not mean that the rest is worthless. It will get refined into some other valuable product, such as kerosine, heating oil, gasoline, asphalt, and so on.

By the way, the main reason oil is on the upswing is the risk that the unrest will spread to other nations in the middle east. Just like it spread from Tunisia to Egypt and now Lybia, Saudi Arabia might be next.

Disclosure: long VLO (and USO) at the time of writing.

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#4) On February 25, 2011 at 5:12 PM, binve (< 20) wrote:

leohaas,

I agree about Valero's positioning

>>This may be true. But that does not mean that the rest is worthless.

Completely agreed. I don't think David Rosenberg was implying that, and I certainly am not.

But what it means is if there is a lengthy disruption then sweet crude gets more expensive, which means less supply to go to refiners, and ultimately higher diesel prices. This obviously has implications for the refiners, but also shipping/trucking especially.

Just a possibility to consider, which is why I was bringing it up.

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#5) On February 25, 2011 at 7:30 PM, ChrisGraley (30.36) wrote:

Another thing to look at is that this should effect European fuel prices more than US fuel prices if the Saudis truly do pick up the slack at 3 barrels to 1.

If the supply stays constant even with the extra oil needed to produce diesel, the Europeans are more reliant on diesel than the US. Given that fuel is not subsidized as much as it is here it should have a greater impact on the European consumer. Given that one refiner stands out in the refining process, they'll also probably ask for a premium to forgo their other customers to pick up the slack in diesel.

 

 

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#6) On February 26, 2011 at 9:40 AM, binve (< 20) wrote:

ChrisGraley,

Those are very good observations! Thanks..

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