Sounds like you still follow them. I'll admit I just read the news about the refiners which is enough to track the general situation. Larger losses followed by large losses shut down capacity etc.

If you are following may you or other can report interestind tibbits you find. Maybe we can say sort of adopt Valero as our poster child doomed refiner

Of course what I wonder about is what strategy they will adopt to try and escape their trap.
Doing nothing and losing money quarter after quarter only works for so long.
Maybe they figure since their a critical industry eventually they will get a gov. bailout.
However even if this is true we simply have to much refining capacity so any bailout would probably only happen after utilization climbs back closer to 90%. I can't imagine even the government executing bailouts until the overall refining capacity at least become more fully utilized.

Only at that point does it even make some sense as a refinery going under once we are back closer to 90% is a bit of a concern. And of course even then gasoline imports have steadily trended lower and distillate inventory crept up so realistically if this is the new normal we actually need to import more gasoline and refine less oil to rebalance the market so ...

Thats not to say the government won't do something stupid but regardless it won't help until the refinery capacity is corrected all it would do is delay the eventual correction and probably force a later more expensive and required bailout to keep capacity we can't afford to lose. Eventually of course I can't see how refineries can continue as for profit entities if oil production is falling since they would be continuously facing a losing capacity battle. At some point of course we will have no choice but to nationalize our refining infrastructure simply to ensure product supplies. This of course is a bit problematic given we import gasoline and have a number of integrated refiners that can actually handle the refining loss if oil prices remain robust. So its not at all obvious how one would nationalize the refining industry only after gasoline imports dropped close to zero does it even make sense to do it in my opinion otherwise external refineries that export to the US will be very very unhappy competing against government owned refineries run at a loss.

And of course government owned anything is not know to function at peak efficiency our cobbled together refineries would virtually be money black holes under either government ownership or constant bailouts. Efficiency would fall and of course probably any attempt to keep the refineries safe or worse they would follow the letter of the law and be down 99% of the time for safety concerns. Boondoggle does not pretend to describe it.

If the government say forced a base profit on the market for refiners same problem moral hazards and refining don't mix well.

No matter how I play out scenarios the situation ends badly esp as oil prices rise and volumes fall.
I can't see a light at the end of the tunnel if you will it just seems to go from bad to worse.

But thats why I'm here watching with interest its pretty clear that something has to give soon but just not what.

Memmel,
I do follow VLO quite closely although I don't own it any more. The VLO board on yahoo.com is quite informative and there are a number of folks that post who probably work in the industry. I have pointed out this board to them on a number of occasions as "the" place to go for intelligent discourse on refining capacity, utlization, etc.
The problem with the refining industry right now in the states is just as you say: Too much capacity. About 1,000,000BBL/day or so. So the independants can't make money. Now add to that an environment where the dollar's falling and crude keeps going up-not good for crack spreads at all.
If you go back to late '07 when the run-up in crude started you can see the cracks drop dramatically all the way through 3Q '08. And by that time, as the price of gas moved up, we had demand destruction for refined products of all kinds. Of course we had this "great recession" happening at the same time and the credit markets had a dramatic effect on the consumer, but the fact is that demand for refined product in this country is very elastic. Much more than many would've thought before the latter half of '08 showed us.
So we have a run-up in crude and the cracks die. Then we have a run-up in gas/diesel and the consumer and industry scale back. Cracks die. This will all lead to a big shakeout in refiner alley. I wouldn't be surprised to see CNOOC or Reliance or Lukoil come in and snap up some assets at firesale prices. And I won't be surprised if at least 2 independants go belly-up within the next 18 months.

Chief

Thanks Chief !

It sounds to me like the basic plan of the refinery industry is simply to try and weather the storm and see who is the last man standing so to speak.

This overall strategy makes sense if they are still assuming a decent economic recovery in the near future. Of course literally every month this does not occur and crack spread remain awful the industry is bleeding money.

As far as consumer demand I've done a lot of work on that side looking esp at rust belt gasoline usage as it entered a regional depression. I use this example to describe gasoline demand.

From what I can tell the best way to think about gasoline demand is its like a bowl of jello that you push your finger through. At first as the economy collapses all the recreational use falls rapidly and people cut back in general this is the jello phase but once through that you hit a extremely inelastic demand level based on demographics and infrastructure design. This is the bowl.

From this point on demand simply cannot change and is surprisingly resilient. However its a glass or ceramic bowl so at some point once pressure is high enough the bowl shatters. The relative forces are actually about right i.e the pressure required to shatter the bowl is orders of magnitude higher than needed to push your thumb through jello.

Now many people think we just had a bowl shattering event however in my opinion not even close it was a jello collapse. This is obvious if you look at the relative rates a jello contraction is fast and furious and a shattering event is long painful and requires ever increasing pressure well above what was needed during the jello stage. And of course you have to have a credible jello event first i.e you can't shatter the bowl until after you have pushed your finger through the jello.


Now that says nothing about demand increasing and the price action during the jello phase depends entirely on relative rates of supply change vs demand change. Any outcome is possible as far as price changes with the exception of as steady increase being the least plausible result. Its the one most likely not to happen other than that its all driven by fairly subtle demand vs supply changes and highly sensitive to even the smallest oversupply.

I'd argue we are now in the plate phase and demand is not based on strong demographic and structural constaints. On the oil drum mainly I repeatedly predicted demand for oil would hit a wall and then go flat to slowly increasing. Indeed as stats come in we seem to have done exactly as the jello model predicts more confirmation we are now at starting the plate pressure stage.

As far as oil refiners go this means that demand will remain fairly constant across a wide range of prices however if we are facing falling oil supplies then the crack spread remains awful effectively forever and there never a profitable moment.

Real economic growth is unlikely so like the rust belt the US will simply flatline at its intrinsic use level. Assuming rising oil prices all that effectively happens as we steadily get poorer and housing is effectively wiped out as housing prices go into a freefall as more and more money is devoted to staying alive.


The only thing that seems to work in this scenario is vertical integration i.e losses on the refining side are absorbed into overall profitability. Someone has to create product to sell but this can reasonably be subsidized using vertical integration. And of course at some point monopoly tactics can be used to stabilize profit margins.

However

The Majors simply don't produce enough oil to execute this and if we are reduced to vertical integration the Majors have no choice but to deal with the NOC's.
Politically of course this is a very very interesting outcome.

Next given the dependence on the National Oil companies for oil even vertical integration by the majors looks to me like a loser or only marginally profitable esp since what oil they do produce tends to be the oil with the highest lifting costs and least profitable tacking on a refining loss does not help the bottom line in the least.

So everyone is basically still screwed and the only way out seems to be to have the Majors absorbed into the National Oil companies. Its the only solution that I can get to work.

Pretty much what you suggested.

The political implications are fascinating and I'm comfortable in assuming and attempt to nationalize refining would be a disaster.

Rock meet hard place.

Monday (yawn)....

http://online.wsj.com/article/BT-CO-200 ... 08813.html

I used to keep a thread on this type of info, but now, some intern for the WSJ is keeping track of it for us, thank goodness, and all we have to do is look on here for the new items every week. This week, it's a pinhole leak in a pipe in New Jersey.... a lot of these places are just now about to come off of turnaround, so do not be surprised if the refinery utilization is actually up for a couple of weeks to produce a little heating oil....One other place is coming off of turnaround...

It is not at all unusual for them to come back up after a turnaround for a couple of weeks, and then cut way back on production and/or shut the unit all the way down if they do not need the product. A lot of times, the engineeers want to evaluate all of the little tweaks that are made in these things during the shutdown......

Anyway, knowing what we do, you have to figure the same or maybe a little more refinery inputs this week, and corresponding higher production. I have the "knob" in the same position it has been for the last couple of weeks, with unleaded at .60 and distillates at a little more than .27

Imports? Well, I know it is a weasel tactic but I put down the same as it was last week. As we know, the variability on this is usually a tanker or so per week, plus or minus .2 mbpd or so, so it will be just a statistical trick, but I am good with that if you are. For unleaded and distillates, I still see the net imports staying where they are as long as the dollar is beaten down.

Demand: A little higher than last week on Distillates, I think the harvest should be at or near its peak right now, at least in corn territory, and for unleaded, about the same.

I have not put in a fudge factor calculation for crude oil yet, but I am tempted to based on last week's apparent appearance of a couple of million barrels of oil in inventory (about the size of one uncounted vlcc). Note that last week, we quit adding to the SPR... We had been putting in a dribble of oil every week on this, but evidently the prices got high enough the decision was made to stop it.

So if all of this happens, we still have drawdowns in unleaded and crude oil, and about even in distillates.

jello? The bored tanker pilots will really enjoy that, I am sure.

Jello shots don't count

I'm sure these bored tanker pilots are also considering other uses of for jello as they count down to spring break

The Harvest is at a standstill.

Worst since 1975. I don't think our farm has picked a single bale.

400% avg rainfall totals Sep/Oct.

[/quote]

http://deltafarmpress.com/cotton/cotton-damage-1026/

Illinois/Indiana maybe 20% of their corn/soy. More rain as we speak.

http://www.spc.noaa.gov/

I was up in the middle of the country a few weeks ago, and the word at the time in some areas they were talking about near record yields, because of the cool weather all summer.....

but the rain most certainly has a chance to turn that upside down...

http://www.cfdtrading.com/2009/10/27/crude-oil-steadies-below-80-ahead-of-wednesday%E2%80%99s-inventory-numbers/



http://www.bloomberg.com/apps/news?pid=20601072&sid=aF_AH0Et_KYU





http://www.reuters.com/article/marketsNews/idUSN2726140520091027

Well, a 1 percent decline is 3 million barrels....I am at least directionally in agreement with the API on crude oil so perhaps my imports number is pretty close to correct.....

I hate it when the analysts whip up on me. Let's see where I was off:

In unleaded, I was off .2 on imports, .2 on demand and .3 on production.... production was a little higher than I thought.....

In distillates I was off by .2 on production and .2 on demand, my production estimate was too high and my demand estimate was too low.... they turned the "knob" all the way over to unleaded this week....

In crude oil I am hard pressed to see where I was that far off... in the second decimal on production, .2 on imports, and only .04 on refinery inputs. I guess it was the import number that was the source of the discrepancy....

So, I did not do too badly but it was one of those weeks where I was off just a little on several things and it was not self correcting....

There was also not anything on here that was too shocking..... when it gets to the point where we are analyzing minor adjustments in the unleaded/distillates ratio, nothing really unusual happened in here...

81.6% refinery capacity is no way to run a refining business though. Something is going to have to give on that..........

http://online.wsj.com/article/BT-CO-20091029-712278.html

There were plenty of little refinery incidents last week, along with some of the continued refinery downtime, this will not affect the calculation too much, though:


There's a little historical unleaded demand increase for the week before Halloween vs. the previous week, (well, OK, it happened in 2007) so I'll estimate a bit of an increase vs. last week.... still below 2007 levels...

In distillates, similar demand to last week....

and refinery utilization about equal or a little less.

We chronically have had problems with forecasting crude oil imports, this week I am not smart enough to forecast anything other than somewhere amid where it has been for the last month or so.

It is not unusual for the refineries to crank up during December to produce heating oil, and it is problematic this year because there is a lot of diesel in inventory already.....so we will have to watch to see whether this takes place...

It will be interesting to see how long it takes and/or whether we get under 80% refinery utilization, which we predicted awhile back......

pup,

What is with carrying the crude ending number out to so many places? Do you mean to be that specific or is that just what the calculator spits out? just curious.

Eh, it's just what the spreadsheet spews out. I probably ought to round it off, but The Dude sometimes likes to figure out how I am doing this calculation....

Right now, I'm using a formula based on the refinery utilization to estimate the crude oil inputs, which get calculated out to the however many-eth decimal place like Excel does, and I just did not notice it....

Ok, I figured it was something like that.

Not too bad, I gained a couple of "directional correctness" points from the pesky analysts....I am still a little behind on the year...

After doing this for a couple of years we know that the decrease in crude oil supply was mainly an artifact of the lower imports, and it was not offset by the lower refinery utilization.

This time of year, when the cold weather starts, you cannot really depend on the week-to-week distillate products supplied, but when OF2 posts his data today he will see that the decrease in distillates is now in double-digits year on year, and probably was about 6% a year ago, so the distillate consumption is probably pretty close to 18% lower than it was in 2007..... You can argue if you want about the ramifications of this.....I still think it will get worse....

We saw an uptick in both unleaded and distillate net imports, I will look in a few minutes whether this is due to more imports, or fewer exports....

The unleaded inventory has drifted around 208-210 for weeks now... that must be where the companies like to keep it for a nice, steady supply.... I was looking back and maybe in July it was 215, but since then has drifted up and down around the 208-210....

The distillate and unleaded "production knobs" were both turned to "high" this week.... thus stronger actual production this week than we saw last week with nominal higher refinery utilization.

More fun next week.