The Marginal Price of Oil
12.15.04
Harry Chernoff, Principal, Pathfinder Capital Advisors, LLC
energypulse.net
Argues that WTI and Brent are outdated bench marks and makes the
following recomendation to investors:
The most successful companies will fall into two groups: producers of light, sweet crudes and refiners of heavy, sour crudes. Investors looking for companies whose production is skewed towards premium crudes should keep in mind that most of the fields in the U.S. and the North Sea that produce crudes literally deliverable against the NYMEX light, sweet crude contract (e.g., West Texas Intermediate, Brent, Forties, Oseberg) are old and expensive to operate. Better opportunities are likely in existing and emerging light, sweet fields in higher-risk parts of the world, including West Africa (e.g., Nigeria, Gabon) and certain fields in the South China Sea and around the Caspian Sea. Some of these crudes, e.g., Nigerian Bonny Light, are also deliverable against the NYMEX contract and others are likely to achieve that status once production reaches internationally meaningful levels.
On the refinery side, the refiners who stand to benefit are those who can process heavy, sour crudes into light, sweet products. Independent refiners best positioned in this area are Valero, Tesoro, and Premcor, all of which are heavily leveraged to sour crudes compared, for example, to Sun, which refines only sweet crudes. Among integrated major oil companies, refining capabilities are across-the board. ConocoPhillips has the highest exposure to refining in general but since refining typically represents no more than 20-35% of the majors’ net income, differences in crude processing capability are of relatively little significance. |
