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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (14067)	10/26/2004 2:35:36 PM
From: mishedlo	Respond to of 116555

Still more on crackspreads from BI ============================================================== There are three basic ways to produce more fuel oil, buy diffrent types of crude oil, shift operations, or have a more complex refinery. First, you can buy diffrent types of crude. Some crudes have more of a paticualr product in them when refined. By shifting the mix of what goes into the refinery you can shift the output. Second, refining is basically seperating crude oil into it's parts. Within limits the seperation lines between say diesel fuel and fuel oil can be easily shifted. By changing your operations a but you can make more of one product vs. another. Third, the more compelx refineries (and yes that is a industry term)have catalytic crackers. These take the heavier parts of crude oil and upgrade them, normally into gasoline because that has the highest crack spread. However, catalytic crackers can easily be run to produce more jet fuel, or fuel oil by adjusting the settings. Refineries are gearing up to produce more fuel oil, it takes a bit of time to buy new crude oils and to shift your operations. The questions as to WHY fuel oil cracks will fall can be found in refinery operations. First, Some firms are starting to hedge in fuel oil spreads by selling forward product into the exchanges, this will likelt increase going forward damping prices. Second, history tells us unless we have a long term colder winter everyone rushing to provide more fuel oil will sink the market. Only twice have supplies been so low and crack spreads been this high over the past 20 years for late october. In looking back the two similar years were in '96 and '00 and in both of those case prices normalized and they had normal winters. So unless we get a very long cold winter I don't think fuel oil prices are going to stay where they are. Third, the heating oil reserve isn't close to being released yet but one quick runup will make it so. Fourth, check this out. Heating oil supplier goes bust fool.com A guy much smarter than me Phil verlenger said that these guys are going to have to change their business. In that business you buy the product with cash and wait for your customers to pay you. In the future, they will deliver less product more often to lower their working capital. He estimates that would result in tanks out in consumer land holding less product which would result in a onetime reduction in demand taking prices down. However, it would make the market more volatile in unusually cold weather. I can't say exactly when, but oil is going down folks and it will be a bumpy ride.