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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: carranza2 who wrote (70657)9/29/2006 5:40:15 PM
From: Wyätt Gwyön  Read Replies (1) of 110194
 
i know what you mean about possible future supply. but i think it is not so certain how much others will be willing to spend to upgrade in North America--these are not trivial investments.

also, it's not like the sour discount will "disappear"--that's basically impossible because sour refining is more expensive and they would all just buy sweet. the question is, what the magnitude of the discount is. iirc, a lot of VLO's sour refining capacity was designed to hit IRR hurdles with a $2.50 sweet/sour spread. so $2.50 is OK--$15 is great. maybe it goes back to 8 bucks five years from now, during which time VLO could buy back 80% of their stock. that wouldn't be the worst of all possible worlds.

personally, i think more sour refining capacity will come online in Asia and perhaps the ME than in North America. so the overall demand for sour should go up. but at the same time, it is clear that sweet crude has peaked so that may go up even faster.

perhaps of more concern is whether the Asian refiners will overbuild relative to their demand growth so that five years from now we have a global refinery glut. my take from VLO mgmt's CC's and presentations is that this will not happen. but, that's just my take on their take. time will tell.

in sum, there are a lot of moving parts when one considers the long term story. but at a 5x PE, i consider the price to have a rare Graham&Doddesque margin of safety--a piercing inverarity these days.
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