Some good news and some bad news from"Barrons" :
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August 24, 1998
Refiners' Blues
The oil glut goes downstream
By Cheryl Strauss Einhorn
Key Commodity Indexes
Refining margins have fallen by 70% since June, to a low of $1.64 per
barrel in the Gulf Coast. And they're not likely to improve much any time
soon. "Although margins will stabilize, it's not happening yet," says Dave
Knoll, Sun Co.'s senior VP for Northeast refining; this is the worst August in
10 years for refiners.
Shares of refining companies show the damage. Most are near their 52-week
lows, though Knoll thinks that's unjust. "We're all running near capacity," he
says. "That's usually a healthy sign in the industry."
What's happening in refined products, like gasoline and even more in heating
oil, is similar to what happened in the crude oil market earlier this summer,
when prices collapsed at delivery time for Nymex futures contracts. Ample
supplies and cheap prices made it profitable to buy oil and store it for future
sale. Storage sites filled up and oil producers were forced to cut back until the
glut was gone. "The crude market is certainly tighter now than four weeks
ago," says Knoll.
Larry Kellner, Continental Airlines' chief financial officer, agrees. "We're
buying fuel as cheaply now as 10 years ago, but lately we've seen the market
flatten out," he says.
But the oil glut had to go somewhere, and it did -- downstream. Cheap oil
kept refinery runs high (3.5% above last year), turning out so much gas and
heating oil that those markets became oversupplied, too. Now U.S. crude
stocks are down slightly while U.S. product stocks are up by 20 million
barrels.
Hence, while oil prices controlled price action in the energy complex in June,
the situation is now reversed. Crude can't rally much if refining margins decay.
And margins will likely remain pressured for some time. Friday, nearby crude
closed at $13.31 per barrel, gas at 41 cents a gallon and heating oil at 34
cents.
The situation is particularly bad for Northeast refiners because storage is near
full at delivery points for the New York Mercantile Exchange, where the
energy contracts trade. Storage is scarce there because Nymex allows third
parties, or trading firms like Goldman Sachs, to engage in storage plays,
taking delivery of products and storing them for sale at a profitable future
date.
Refiners themselves don't like to have a lot of inventory. Instead, they prefer
to use just-in-time delivery. This isn't entirely feasible, though, for while
storage is costly, refiners' products have opposite seasonal demand patterns.
Gas demand is summer-based, while heating oil's comes in the winter months.
Storage figures for the U.S. show that of the 24 million-barrel surplus in
distillate stocks over the last year, 19 million are sloshing around the
Northeast, while Midwest storage is flat with last year. "Refiners don't store
much," says a senior refinery executive. "We'd rather take our lumps and keep
selling, but the fact that the Nymex allows third-party storage destroys the
market. Demand has been good but we're cutting back runs simply because
there's no home for our products. The huge storage is third-party storage."
Bernie Purta, Nymex's regulatory chief, confirms that current heating-oil
deliveries are running well ahead of past years. While the Nymex doesn't
allow speculators per se to take delivery, trading houses may do so and not
sell until later.
That's bad news for refiners Sun and Tosco that deliver to places like New
York Harbor. Already Tosco has cut runs partly for this reason.
Conditions are slightly better for refiners elsewhere, like Valero Energy and
Ultramar Diamond Shamrock, where the market is tighter and fuel grades
differ from Nymex's contracts.
Thus, heating-oil stocks haven't been this high on a seasonal basis since 1981.
But back then, the trend was far more dominant because of the inroads of
natural gas into the winter heating market.
Hence, while refiners are covering their average variable costs to run plants
and buy oil, which are under 25 cents a barrel, some are not covering their
total costs. "We're cash-positive, but we're not making any money," says a
refiner.>>>>>
Not sure if I understand why refiners can't make money with cheap crude. Maybe someone can explain in simple terms I can comprehend. Rich |
