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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (41763)	9/16/2005 11:29:23 PM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 110194

a) the impacts of environmental regulations are on product supply (reducing it), while b) the impacts of high supply of sour crude and tight supply of sweet crude in a world where most refiners are geared to sweet are to increase demand for sweet while demand for sour stays low. because of environmental issues a la a), we face a reduction in marginal supply. e.g., elimination of MTBE from US gasoline will reduce domestic supply by 130 Mbpd. and another 130 Mbpd will be lost from low-quality blendstocks. incremental additions of higher-quality blendstocks will add 115 Mbpd. that leaves 145 Mbpd of incremental supply that must be attracted from overseas at higher margins. see page 8 of customer.talkpoint.com as you noted, it is expensive and difficult to refine sour crude. therefore, many refineries have been built which can only refine sweet crude like Chevron's. hey, it sounds great, doesn't it--build a cheaper plant, run a cheaper plant. guess what--lots of people had the same idea. and now they're all competing for a dwindling global supply of light sweet crude and causing WTI to skyrocket. (the popularity of this decision reminds me of the way all the power companies added gas-fired plants at the same time, all based on the same assumption of $2.50 NG for the long run: it may make sense for an individual refiner or power plant, but when everybody does it, there can be unintended side effects.) this is not just in the US but also a lot of Asian refining capacity additions. there is a huge refinery demand for sweet crude, production of which may already have peaked. at the same time, the crude additions by the Saudis are too sour for the same refineries. so this sour crude goes for much cheaper. this is a great situation for the sour refiners--plenty of supply of their input product, and a dearth of supply for their competitors (sweet refineries). since the end product must be priced economically for the sweet refiners, the sour refiners make a killing. i think the peak is already in for sweet crude. if so, the sour refiners will have a great advantage in the years ahead.