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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Ed Ajootian who wrote (157031)	9/15/2011 5:15:38 PM
From: raybiese	2 Recommendations Respond to of 206093

"missed another even bigger factor, which is the Libyan oil being off the market." Ed: That is exactly the point I was disagreeing with. Libyan oil being off the market affected the prices of all globally traded crudes and not just the light sweet (similar to Libyan grades). For a EIA discussion from a global perspective, see: eia.gov The world no longer runs on sweet light. You can see the different grades track together here: eia.gov and see the USA imports the heavier grades (as inferred by actual prices paid) here: eia.gov The subject of my analysis was the mechanics of the disconnect of WTI as seen in the Brent-WTI differential. If WTI was 'flat' over 2011 and Brent fluctuated up & down, then you would have to say that it was only Brent that was affected by Middle East conflicts & flow disruptions with WTI 'insulated' from global events.... but that is not what was observed. However during the same period, refined product (especially gasoline) maintained its strong linkage to Brent plus a 'normal' crack spread in the same geographical regions (PADD II & IV). Not true for WTI. Synthetic (SCO) grades are still heavier than WTI yet are being sold at a large premium to WTI within the same PADD II & IV markets. (Current data attached below.) IMHO, it is WTI that is wonky, not Brent. I am certain that if Cushing had an ocean port facility, it would be priced at a small premium to Brent (as it was for years). WTI is a very slightly higher grade than Brent with similar API & slightly lower sulfur. From Platts: platts.com WTI- Cushing. API gravity is typically 38-40 degrees with sulfur content approximately 0.3%. Brent/Ninian Blend (BNB), Sullom Voe terminal. Currently, the API gravity is estimated at 38 degrees and the sulfur content at 0.45% sulfur, but the qualities of all crude oils tend to change over time Platts Brent uses a de-escalator of 40 cents/barrel for every 0.1% of sulfur from specified (usually 0.6%). The reversal of the (formerly small) Brent-WTI discount to the (current massive) premium 'burped' in ~2008 but so what.... everything was broken in late 2008. Additional storage was added at Cushing in this period. Now we get this action: A chart from Bespoke (assumed from the 'premium' article): bespokeinvest.com I copied this chart from: blogs.wsj.com "Otherwise, this seems mainly to be a big money-making opportunity for somebody. And a reminder of how easily manipulated these markets can be, especially WTI, where it doesn’t take a lot of oil movement to create the illusion of tight or loose supply in Cushing, with big effects on prices." This WSJ blog comment was obviously referring to NYMEX 'paper barrels' and Cushing storage levels and speculative trading defining the price of crude as indicated by the embedded link to: blogs.wsj.com plus the comment of "illusion of tight or loose supply". Separately reported, the CFTC looked into NYMEX trading and found a lack of evidence to link speculative NYMEX trading to the price of WTI. However, IMHO, the concept that small volumes of WTI crude can actually create a 'glut' or 'shortage' is quite true and real. Even simplistic 'traders' understand 'high storage'='glut' and 'low storage'= 'tight' and see the potential for large price swings with the 'application of money to fill storage' as a mechanism to affect price. However, from a physical side, even mechanical engineers (an unwarranted friendly jibe) understand that flow in-flow out= rate of accumulation. The left side is the simplistic pipeline analogy and the right side is the simplistic traders analogy. Going to the next level deeper to the mechanics was the intent of my analysis. Added to this are the 'grade' factors which are also very important. WTI (and Bakken) are sweet light grades. Much of the Canadian production growth has been in heavy grades and synthetic but that was not the topic of the post. Synthetic can be a 'substitute' for WTI in the refiners feedstock mix but the heavier, sour grades require processing capability which, I believe, most of the mid-west and US Gulf Coast have. 19-22 degree API is different still. Now to get a bit silly to make a point. *If I were the "King Of Bakken"* and my loyal crude producer regents & serfs were working hard to increase production from 100k bbl/day to 800k bbl/day over 5-ish years. Yet I see their margins being squeezed by $20/bbl when selling to the adjacent kingdoms, what could I do to help my loyal subjects? Let's see, what would be my budget? Let's start with 350k bbl/day x 365 x $20/bbl = $2.6 Billion per year. Yup, pretty sure I could buy the Seaway Pipeline with that sort of cash flow. If the adjacent kingdoms don't want it, I can ship the crude from the US Gulf Coast to anywhere in the world willing to pay top dollar for my premium product. I really shouldn't have to do this. All I really have to do is give a firm offer to contract 'transportation services' from the Bakken to FOB dock facilities on the US Gulf Coast. Someone will build a new pipe if existing pipeliners refuse to reverse flow or the rail guys will step up to the plate. Risk is a 350,000 x 365 x 5 x $8= $5.1 billion commitment to gain $20-$8= $12/bbl (minimum) premium on the full production. If an existing pipe northbound from the US Gulf Coast eventually goes empty, I can buy it for a song, reverse it and ship another 350k bbl/day later on. Ah, yes... if I were the "King of Bakken". Maybe I can daydream about being the "Emperor of Edmonton" later on this evening. Ray Oh ya, the current (Sept 12/11) data: Canadian crude-Upgrader outage lifts synthetic premium 52 minutes ago by Thomson Reuters * Light synthetic quoted at $11.50/bbl over WTI * Syncrude upgrader work removes 100,000 bpd * WCS discussed at around $12 under WTI CALGARY, Alberta, Sept 13 (Reuters) - The premium for Canadian synthetic crude widened on Tuesday on word that Syncrude Canada Ltd, one of the country's biggest oil sands producers, began maintenance on a major processing unit, industry sources said. Light synthetic for October delivery was quoted as high as $11.50 a barrel over benchmark West Texas Intermediate in mid-afternoon, up from $10.75-$11 over earlier on Tuesday. Late last week it sold for about $11.45 over. Canadian Oil Sands Ltd <COS.TO>, Syncrude's biggest interest owner, said the planned outage of Upgrader 8-2 had begun. Work is expected to last 40-45 days, removing about 100,000 barrels a day of production at the site . The maintenance had been expected to start this month or next, although Syncrude's owners had not specified an exact date. The outage comes as Husky Energy Inc <HSE.TO> works on its Lloydminster heavy oil upgrader. Canadian cash crude prices have weakened since early last week, when the differential between WTI and world benchmark Brent widened to a record above $27 a barrel. The transatlantic spread was around $21.85 on Tuesday. Western Canada Select heavy blend was quoted at around $12 a barrel under WTI, compared with $10.50 under last week. (Reporting by Jeffrey Jones; editing by Rob Wilson)