The price of crude seems to go up whenever there's a refinery problem. I'd certainly expect the price of refined products to go up, but crude should go down (or at lest stay steady), since the refinery is now presumably dumping its incoming crude on the spot market.

What am I missing?

Personally Frank, I think you're missing about 12 beers and maybe a bag of marijuana. Go back to sleep Frank.

You aren't missing anything. You are thinking. You raise a valid point that I raised a few days ago. Under classical economic theory, if demand for oil drops, then the the price of oil should decline. Maybe Lynch will come up with a new economic theory called "supply side speculative theory" that says that any bad news in the energy industry means that that the price of oil increases, even if it has no direct links to oil.


I can see the article now. CNN: "Oil prices shot up today due to the spillage of a quart of gasoline by John Jacobs, an employee of Joe's Auto Repair, while he was filling up his car. Analysts believe the quart of gasoline signals that people are wasting gasoline everywhere, thus increasing demand for gasoline and hence oil."


I think what's really going on is that the reporters don't know what to put in their articles. They have deadlines. So they write what some analyst tells them.

But good job using your brain, IMHO.

Hm, good question.

Yes, it is a good question, and we have good company on this. Kenneth Deffeyes ("Hubbert's Peak" and "Beyond Oil") wonders this too. Here is the link for this:

http://www.princeton.edu/hubbert/curren ... 05-04.html

He says:

During the debate about high gasoline prices, one of the issues raised was the limited U.S. oil refinery capacity. Currently, refineries in the U.S.A. are running at 95 percent of capacity. No new refineries have been built for decades. However, last week the shortage of refinery capacity was being blamed for the high price of crude oil. I emphatically do not understand economics, but I would have thought that a refinery shortage would increase gasoline prices but would LOWER crude oil prices. If I own crude oil and can't find a refinery, I don't expect to get paid extra. That story became less prevalent this week; maybe economists are smarter than I thought.

I think it has everything to do with the requirement that a news article on the price of oil MUST assume any price change is due to a short term phenomenum. It doesn't matter how stupid the reason is, a heat wave, a cold snap, refinery fire, christmas, pipe line sabotage, hurricane, labour dispute any reason will do.

The one I get annoyed with is how the seasons are supposed to affect the price of oil. Like winter or summer are such big suprises. Crude oil demand is not affected by the seasonal fuel demands. Refineries are run the year round and build stockpiles in anticipation for the high demand seasons.

I dont't understand myself, maybe the stocks are low in term of days-of-supply:


src: Short-Term Energy Outlook – April 2005

From Platts:


does it make any sense to you!

Hmm, maybe this is referring to the differences in oil refining of light sweet crude oil, and heavy sour crude oil? I think somebody mentioned that refining capacity for heavy sour crude oil is too low, that would naturally create more demand for light sweet crude oil.

On the other hand I can't think how the analysts could miss to mention such important details. Yes the real scandal is that actually nobody questions such statements about the reasons for rises of prices for oil.

It's really astonishing how people at a certain point stop asking questions. I can't explain that other than active denial.

Recently I saw a german TV-report about the reasons for high gas prizes. It started out on a pseudo-investigative-journalism report on differences of gas prices between different gas stations on different seasons, and that the company headquarters calculated them on a day-to-day basis. At this time it seemed that the reporters thought they where on the trails of a big conspiracy of a gas-cartel At the end of the show they actually had the idea to interview a gas-company official how they made the prices and came to the astonishing conclusion that crude oil prices dictated gas prices. And then what? The show ended. Because they obviously thought that crude oil prices where god-given. And in some ways they are right, but they don't ask if this prices will go down again, because subconsciously they know the answer and what this means.

Pure fear and active denial, that's what it all comes down to. As I mentioned earlier, I definitely see fear in the body-language when reporters are interviewing oil - analysts. I wish I could post clips or pictures to illustrate what I mean. especially the eyes are very telling, and they speak very careful, and try not to ask the wrong questions or give the wrong answers...

Nope that made no sense at all to me. It sounded like complete gobbledygook.

I think I'll go with the "The reporters have no clue" theory.

I know I'm gonna explain this wrong and it's been
many years since I used to do these transactions
so be gentle

It's basically a 'paper' refinery trade ..
correlating the current values using spot contracts
for crude/heating oil/unleaded gasoline .. All things
being equal or nearly so

2 crude = 3 heating oil + 2 unleaded

If the $$$ values are close to refinery spreads
then prices are "correct" otherwise major arbitrage
opportunities between physicals and paper exist for
traders to exploit ..

Don't laugh, but the trades are known as

'crack' = long crude & short products
and
'reverse crack'= short crude & long products


Triff ..

Triffin, thank you for your explanation! it's nice to have answers from an insider but I still dont get it!

I think Free has it part right. A barrel of light sweet can be refined into X litres of petrol. A barrel of heavy, sour, with other contaminants can be refined into Y litres of petrol, where Y is markedly less than X.

If this theory is correct, when refining is the chokehold, one would expect the spread between the price of LSCO and lousy crude to increase.

That's the theory. In reality, the markets are like a bunch of ferrets on crack, chasing anything shiny.

Triffin - thanks for the tutorial. Arbitrage is fascinating, and now "crack" takes on a new meaning.

My concern is in your statement "all things being equal". My thinking suggests that if refineries are near capacity, then the cost of affecting arbitrage for one set of paper contracts increases with the marginal cost of refining each extra barrel--which should increase along side the increasing demand for each barrel of fixed refining supply. So (poor explanation), as refining capacity approaches max, the price difference possible between crude and product would need to get very large before it pays for the cost of the arbitrage transaction?

So arbitrage may make financial sense if the marginal cost of refining that barrel is only $3 (because there is lots of spare refinery capacity). But as demand for that refinery capacity increases far faster than supply for refinery capacity, the marginal cost of refining that barrel may be $15, so there would have to be a greater than $15 discrepancy in the "crack" before arbitrage will bring those prices back to within $15. Which brings me back to FrankRichard's initial question: what am I missing?

I may have this way off, but that's about as much as I can wrap my brain around...

~Jeff

Are these crude prices for oil being sold that day or is it Futures? I can see how futures might rise on refinery problems (assuming gas prices would rise in the short-term).

??

http://quote.bloomberg.com/apps/news?pid=10000103&sid=axnIScqicE_A&refer=news_index

months of + $50 oil have created demand destruction, and this may lead to a whirlwind of bad news coming thick and fast re: the state of the economy in the us and worldwide.

looks like we cant actually handle prices much higher than, say, $35-$40, without having a mini recession.

we probably wouldnt be heading into another recession if it wasnt for the amount of debt the average person has though. most people are living month to month, barely keeping up with their debt repayments, and any increase in living costs sucks what little spare cash they had to spend on luxuries out of the economy.

seems to me that we wont be seeing peak oil this side of 2010 - due to a worldwide demand slowdown, causing opec to restrain production.

of course, in the next upswing (if there is one?), oil proudction might then peak a few years later. ive said before, the plateau may therefore last from about 2005-2015, with two clear 'peaks' - one around mid 2005, and one in 2015 at a slightly lower level.

what do you think? either way we're screwed. i know i am anyway - i'll likely be bankrupt by 2006.