The En-Pro Blog

At bat is Casey Consumer, a batter with a good eye for the strike zone with a count of three balls and one strike. The umpire is moody, shortsighted Eddie
Esso. Here’s the pitch. The call. “Strike two the batter is out!” No. Wait. Hold on it’s three strikes and you’re out. Not so, as Eddie Esso changed the rules. The sports metaphor applies; as it seems the constant back and forth, rallying is what is happening with diesel prices right now.

But the rules have changed. When the rules of the diesel price game were established, daily rack prices in the eastern part of the country followed the daily changes in the New York Harbor (NYH) futures prices of Heating Oil while in the west rack prices tended to follow the price of crude.

This was fine when refining margins demand and reported quarterly earnings were high. Now we have low margins, demand down 11% and earnings down on an average so far 50%. What we have noticed, as illustrated in the graph, is that since early June of this year the daily rack changes have not been following the changes at the NYH. In other words, the rack increases have been higher than the NYH increases while the rack decreases have been lower than the decreases at NYH. In addition, we are now, at the mid point of the traditional high gasoline demand season.

What does this mean for refinery utilization and a seven-month look back to the beginning of this year? And how will the daily cost of leasing capacitor tankers influence the coming months? Check out the En-Pro Energy Report. Sign up; send us your email to info@en-pro.com for the latest news, views, and oil industry buzz.

By: Roger McKnight, Senior Petroleum Advisor

The Globe and Mail reports today that the recession is over, but the recovery will be painful. What we know in the oil business is that the recession has suppressed demand and increased inventories, eroding their once beefy diesel and gasoline margins to baloney thin profits in 2009. They will not be able to repeat the stellar results of 2008 disappointing their anxious shareholders. The current economic climate indicates profit levels won’t begin to rebound until 2010 at the earliest. What are these oil executives going to do? They will continue to tightly manage their costs by eliminating all unnecessary expenses, cancel major development projects, and look for strategies to maximize return on investments during this downturn.

The recessionary cracks in the foundation of Big Oil have taken their toll with three major announcements/rumors made last week that could have major impacts on future supply and fuel pricing. The first salvo of bad news was Shell’s announcement that they will be conducting a strategic review of their Montreal refinery that may affect Eastern Canadian fuel users. It was built in 1933 and processes 130,000 barrels/day of crude.

With the current and future prospects for poor refining margins, it doesn’t make sense to continue investing in a 76 year old asset. Over the next few months they will decide whether to sell it, convert it into a fuel loading terminal or close it.

In another serious foundation crack, we learned through an industry source that Esso is currently reviewing their Canadian cardlock operations and considering closing down the company owned network.

So what do these stunning possibilities in the Canadian oil industry mean for Canadian business? And what will it mean for Canadian truckers traveling in the U.S. with the shocking announcement that Flying J is merging with Pilot?

Find out in this week’s Energy Report. Sign up sending your email to: info@en-pro.com.

By: John Voros - Petroleum Analyst

Two items that reflect the state of the market are crack-spreads, (the difference between wholesale rack prices and the price of crude) and, U.S. Canadian refined product differentials (the differentials between U.S. refined product prices and Canadian rack prices), or an indicator of the import/export alternative pricing.

The “crack-spread” graphs indicate that the crack-spreads or refinery margins for ULS diesel for Halifax, Montreal, Toronto and Edmonton fell from an average of $0.2812 CAD/L on January 9 to an average of only $0.0716 CAD/L on July 4, a $0.2096/L reduction. During this period the price of crude actually increased from $41.70 US/BBL ($0.3118 CAD/L) to $66.73 US/BBL ($0.4877 CAD/L), a $0.1759/L increase. During this period the average ULS diesel rack price for the four stated locations fell from $0.5930 CAD/L to $0.5593 CAD/L. A reduction in rack prices during a period when a major increase in the price of crude has occurred indicates either a large reduction in distillate demand or a large increase in distillate inventories or a combination of both.

So what does this mean for Canadian oil companies and what are the differences broken down by regions in Canada? Find out in this week’s Energy Report. Send your email to: info@en-pro.com.

By: Roger McKnight, Senior Petroleum Advisor

Gasoline and distillate inventories rose by 2.3 and 2.9 million barrels over last week while crude inventories fell by 3.7 million barrels, but inventories at Cushing, Oklahoma rose by 400,000 barrels.

As it has been for quite some time, the supply and demand scenario is pretty much the same old story. As a matter of fact, much of the “new” news in energy is the same every week; the manufacturing industry across the world is improving, although overall inventory levels remain high and demand levels remain low, job loss rates are improving, resale housing sales are increasing, etc.

To add fuel to the fire, the following chart illustrates the demand levels of gasoline in the U.S. over the last three years. (To subscribe to the Weekly Energy Report, send your email to info@en-pro.com) You’ll see that from 2006 to 2008 demand steadily increased until July and then sharply declined once we hit September. This is the typical scenario, but this year has not followed suit, demand has actually moved in the opposite direction.

When the economy recovers, the expectation is for a sudden jolt in prices. Although that may be the case, demand levels could have a slower than expected growth due to the higher fuel efficiency of domestic and foreign vehicles.

With the above evidence of reduced demand, and the influence of gasoline prices on crude prices, one would expect the price of crude to be relatively soft. As we have stated on numerous occasions, crude oil is highly over-priced and speculation is to blame. As we know, there has been an increase by investment funds in purchasing crude.

The issue we would like to address is the fact that these funds invest with a long-term goal in mind where funds are constantly buying contracts regardless of market fundamentals, such as supply and demand. These investors increased their holdings to an equivalent of 600 million barrels in June, which is up by 30% since the beginning of the year, where over the same period crude prices have jumped by 60%. It is obvious that speculators have had an impact on the market, but stand a good chance of getting their hands caught in the cookie jar.

By: Roger McKnight, Senior Petroleum Advisor

If the oil companies are making healthy margins on gasoline despite flat demand, it begs the question, why are they reducing refinery runs?

We think it’s because they are looking at the current diesel margins (crack spreads), low demand, and huge inventories both on land and off shore.

If this is all in place come the heating season, then if they think margins are low now, wait until October.

But that’s a simplistic overview. Let’s get to the root of the refining industry’s problem.

Most refineries on the Gulf Coast have retooled to allow them to refine heavy sour crude (SC) as opposed to the light, sweet WTI crude (SW). The incentive for the change was that SC was sold at a discount to SW. For example, from 1999 to 2009 the spread between the Mexican SC and the SW averaged $10/bbl with a high of $16/bbl in 2008.

This spread has slipped to $4/bbl in Q1 2009 and in fact in the first week in June 2009 the spread was negative with SC being higher than SW. In an effort to increase the spread, some refiners shut down cokers and hydrocrackers. The reason for the reduction in the spread is that when OPEC announced their production cut last December, most of this was in the form of SC.

So what are the reasons for the reductions in refinery runs and what does it mean for the rest of the driving season – and – what will be the refining industry’s last resort? Find out in the latest Energy Report. Sign up by sending us your email to: info@en-pro.com.

By: Roger McKnight, Senior Petroleum Advisor