April 2007 Archives

Some observations from about one half-day at the Offshore Technology Conference in Houston:

When a news reporter is deciding whether to cover a speech by Matt Simmons, it often gets down to the old definition of news: when a dog bites a man, that's not news. When a man bites a dog, that's news. You know pretty much what Matt is going to say, so by that reasoning, it's dog bites man. But regardless, he is controversial, he lays his arguments out with a great deal of clarity, and though some of his critics might disagree, he's not a crackpot. There is no doubt that he thinks some of the more optimistic projections of the world supply/demand balance are pure hokum; he famously engaged a key analyst of the International Energy Agency in a several-hour dinner debate several years ago regarding their opposing views.

A defining MTBE liability case is scheduled to go to trial in January 2008, possibly setting the terms for the settlement of another 81 suits currently filed in the US, an attorney for the defense said April 28.

Stephen Riccardulli, an attorney with McDermott, Will and Emery, told attendees at the Society of Independent Gasoline Markets of America spring conference in Tucson that the largest of four "focus cases," filed by the Suffolk County Water Authority in New York against a number of oil companies, is scheduled to go to trial in the Southern District of New York.

More on what it takes to sell E-85 at the pump...

Soren Anderson is a doctorate candidate at the University of Michigan, specializing in biofuels. As part of his research, he's studying some of the same ethanol retail issues that were discussed Thursday here in Tucson at the spring meeting of the Society of Independent Gasoline Marketers of America.

How many gallons are in five gallons of gasoline?

The issue is one of physics. In warmer temperatures, gasoline contracts. So the five gallons that comes out of the nozzle would not have as many Btus as five gallons in a colder climate. But the price doesn’t adjust for that fact, which has prompted charges of consumer fraud against oil companies, notably in southern states.
SIGMA isn’t taking the issue lightly. With more than 30 civil lawsuits filed in the US over the issue, and state legislation proposed in Missouri and Texas, the Society of Independent Gasoline Marketers of America is taking a hard stand.

The math, it appears, is tricky. How do you sell E-85 at retail at a price less than gasoline, to account for its poorer fuel efficiency, when ethanol sells for more than gasoline in the open market?

Ethanol and renewable fuels is big here in Tucson at the spring meeting of the Society of Independent Gasoline Marketers of America (SIGMA). There are 14 education sessions; 6 of them deal with renewable fuels.

Bill Moyers had an excellent special last night on PBS regarding the media and its failure to question official statements and do independent reporting in the runup to the Iraq war. I was reminded about the slew of recent stories about the inverted WTI-Brent spread.

In all the the overexcitement about the "broken" WTI contract, reporters from various news services have quoted traders (anonymous, of course) saying that speculators are starting to pull money out of WTI and put it into Brent, as a result of the inverted WTI-Brent spread.

US gasoline stocks continued to be drawn down well below normal levels for this time of year, according to the data released this morning from the EIA. While 700,000 of the 2.8 million barrel decline was on the isolated West Coast, inventories fell in every region.

At 194.2 million barrels, total gasoline stocks are at the lowest level since October 7, 2005, following the massive hurricane-related refinery outages on the Gulf Coast. Refinery utilization fell unexpectedly last week, slashing gasoline production at a time when it usually picks up.

Red Cavaney, the president of the American Petroleum Institute, held a conference call for bloggers only on April 18. API assures The Barrel that it will be invited next time, but our relative youth meant we weren't on the organization's radar this time around.

A transcript of the call shows that ethanol was very much on the mind of the questioners, among other issues:

The call occured just after the release of the study by Stanford University atmospheric scientist Mark Jacobson projecting significant increases in some atmospheric pollutants should ethanol use continue to increase.

Although the first-second month spread in WTI is starting to snap back toward some semblance of normalcy, its big blowout leaves in its wake questions of what it might take to not have this happen again. (If one assumes that what has occured is something to be avoided, which not everyone agrees with).

Two possible solutions, one physical, one market-oriented:

At an analysts' forum in New York a few weeks back, Mike Cockrell, Teppco's senior vice president-commercial upstream,said Teppco is Teppco Partners is considering reversing the direction of its 300,000 b/d Seaway crude pipeline, which runs from the Texas Gulf to the NYMEX hub in Cushing, Oklahoma. If that were to be done, it means that a buildup in crude inventories like the one that has pushed down the value of front-month WTI to both second-month WTI and Brent is less likely to happen. No more "roach motel," where the crude goes into Cushing, but can't come out. It would be able to exit to the south...and to the Gulf Coast. That greatly reduces the possibility of the huge buildup in crude that blows out the first month-second month spread and pushes down the value of WTI to Brent to less than historic norms.

The EIA reported a 2.7 million barrel draw from US gasoline inventories last week. But a jump in production on the West Coast kept US gasoline inventories from an even steeper drop.

The West Coast market is largely isolated from the Gulf Coast refining center. With very limited pipeline access into Arizona, and the Jones Act making shipping from the USGC expensive, the market tends to rely on its own limited refining capacity. When that fails, imports from Canada, the Far East and Europe take up the slack.

It had to happen -- the poor much-maligned WTI contract, under pressure for weeks, accused of being broken -- snapped back as Valero restarted their McKee refinery. What a shock!!

The May/June spread, which had entered expiration week valued at -$2.70/b, rose as strong as -$1.25/b midday Tuesday. The tighter spreads has had a knock-on effect for the bloated crack spreads -- the May 3-2-1 spread fell from $24.01/b Friday to $19.62/b late Tuesday.

There's a lot being written about how US crude inventories in Cushing, Oklahoma are abnormally high due to refinery issues and general oversupply, which has crushed the front of the WTI curve and the WTI-Brent spreads.

There have been stories lately referring to WTI as a "broken" benchmark, due to the front-month futures contract trading at a steep discount to front-month Brent futures, and cash WTI at a discount even to Mars, a heavy sour grade.

What constitutes a "broken" benchmark? Is it broken because it trades outside of historical norms for an extended period? Or because it is shown to have a fundamental flaw that leaves it open to being pushed one way or another? Possibly -- in which case one can make an argument that WTI is broken.

Another big drop in gasoline stocks last week and record-high Cushing crude stocks should keep the May RBOB crack spread moving higher. It's up another $1.12/barrel so far, to more than $28/barrel.

My comments from last week still hold true, about the "real" margins not being anywhere near as strong as that NYMEX crack spread would imply.

Renzo Pipoli and I last week visited an under contruction ethanol plant, Louisiana Green Fuels, just east of Lake Charles. It is unusual in that it is one of the first fuel ethanol "biorefineries" (what a word) to be constructed outside the Midwest, and it is the first in the US to use sugar as a feedstock, not corn.

Sugar should theortetically have better economics than corn. For one it is easier to grow, that is, it uses less pesticides and fertilizers. The waste from the processing of sugar is burned in a boiler to generate steam that runs a power generator. According to the operators, the plant will ultimately sell power back to the grid.

NYMEX crack spreads keep on rallying Thursday, but how much of that is really product strength, and how much the depressed front of the WTI curve? May/June WTI traded out to below -$2.20/barrel, and the monthly index rolls are yet to start. Wait till next week, when the curve should get hammered some more.

The great crack spreads are great for refiners, but looking at the crudes these refiners are actually running makes the spreads look not quite so good.

Gasoline stocks fell 5 million barrels, way more than expected...all in the Midwest and Gulf Coast. The Whiting refinery outage certainly didn't help production in PADD II, and pushing the last winter grade stocks down the pipeline while the NYMEX cuve is in backwardation had a lot to do with the big drop. The RBOB crack is up $1.75 after the report.

I attended an Enterprise Risk Management Symposium in Chicago last week, and came away with a few impressions from comversations with the speakers there relating to energy companies and risk management:

1. Enterprise risk managemet (as defined by an company-wide risk management plan that looks at the various business lines, not just the trading desk) at merchant energy companies is a "vision, not a reality".

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