Reviews of Oil 101

1. A review of Oil 101 just posted by Robert Boyd.

"I am relatively new to the energy business. One of the things I had to do as soon as I started was to take a course given by Baker-Hughes about all the stages of the oil and gas business. It wasn't a bad course, but I now think it would have been better for me just to read Oil 101 by Morgan Downey......Oil 101 is an excellent handbook, and should be on the desk of anyone in the oil (or gas) industry, regardless of where in the value chain you are." (full review here)

2. Another review here.

Escape from Oil ca traz

At an energy conference in a place called "Alcatraz" University near Perugia, Italy over the weekend, I had a conversation with a Swede about the country with the most agressive plan to almost completely phase out oil use.

Supply-Driven Oil Price Rally

Carl Etnier from the Rutland Herald wrote an interesting piece on why oil prices have been rising and to role of speculators. Carl mentioned an article to me that said the rally was due to speculators because oil demand is still weak. My response was:

"The thing that annoys me about those sorts of articles [blaming speculation] is that it says oil demand is down and so price should not be rising. Since the beginning of 2009 demand is down year on year by 2 million barrels per day but supply is down over 3.5 million barrels per day (due to OPEC cuts)."

US Traffic Growth

In April 2009, miles driven by US motorists increased year/year for the first time since late 2007. The US DOT traffic data released today for April is a lagging indicator of oil demand. The average price of crude oil (NYMEX WTI) back in April 2009 was $49.95 per barrel. It will be interesting to see if this traffic recovery continues now that oil is hovering around $70 per barrel. Complicating year/year comparisons this year will that this year's data is being compared to a period when oil prices spiked during 2008 and the credit crisis.

US Inventories & Summer Doldrums

Chart: Crude Oil (NYMEX WTI) Prices Over the Past 8 Days

The oil market has been chopping sideways around $70 over the past few days. Weekly US oil inventory numbers are released by the DOE each Wednesday at 10:30am New York time. This week the data provided little impetus for any price move for the oil complex. Bear is mind that although US data is widely followed, it is the source of less than a quarter of the world's demand. Nonetheless, US data is viewed as a barometer of global supply and demand. I was quoted in the Wall Street Journal today:

The draw in crude stockpiles and the rise in gasoline "offset each other, and the effect on the market was neutral," said Morgan Downey (WSJ)

Crack Attack

Cracks are the spread between the price of a finished product (gasoline, diesel and so on) over* crude oil. A crack is usually quoted in US dollars per barrel. The crack could be thought of as oil refinery's US$ per barrel profit margin before the costs of running the refinery.

Over the past few months we have had very low gasoline inventories (as gasoline demand has recovered from the 2008 oil shock causing inventories to fall) but very high diesel and jet fuel inventory (as commercial activity has not recovered to the same extent as gasoline demand).

In 2009, Gasoline cracks (see chart 1) have been increasing while distillate margins (see chart 2) have been decreasing. The net result is that, in 2009, gasoline prices at the pump have increased more quickly compared with crude oil prices. Diesel and jet fuel prices have increased more slowly than crude oil prices in 2009.

Refineries produce a basket of finished products including gasoline, diesel, heating oil, jet fuel and residual fuel. Net refinery profitability (a proxy is called the 321 spread) has moved sideways as higher gasoline margins are offset by lower diesel and jet fuel margins (see chart 3).

Chart 1: Gasoline Crack
Chart 2: Heating Oil Crack (proxy for diesel and jet fuel)

Chart 3: 321 Crack (proxy for total refinery basket margin)

*Cracks tend to be positive except for residual fuel oil cracks which tend to be negative. See Oil 101 for more.

Iran and Oil

Iran is a strategic pivot point for the oil market. Iran is a large crude oil exporter, it is close to large oil exporting nations and it borders a major oil transit waterway (Strait of Hormuz).

The election result in Iran a few days ago were surprising to some outside of Iran - they shouldn't have been - at least according to Stratfor, a Texas-based private intelligence agency. Stratfor has a summary of how the election resulted in Western Misconceptions Meeting Iranian Reality. Their conclusion:

"For the moment, the election appears to have frozen the status quo in place. Neither the United States nor Iran seem prepared to move significantly, and there are no third parties that want to get involved in the issue beyond the occasional European diplomatic mission or Russian threat to sell something to Iran.(Stratfor)

Plus ça change

How much oil is stored in the European Union (EU)? Official oil inventory reporting in the EU is weak compared to that compiled in the US. Today the EU "overhauled" its reporting mechanism for oil inventories but rejected a proposal to report inventories weekly (as they are in the US). From Reuters:

"Monthly reporting of stock levels is a small change from the current system under which EU states must confirm each month whether they hold 90 days-stocks, but need provide no more detail." (Reuters)

A Market Yen for Kiloliters

As mentioned in Oil 101, oil is traded in US dollars because it most efficient for everyone (consumers and producers) involved. Oil floats freely against the US dollar and all currencies. If the US dollar or other currencies weaken then oil prices rise in all those currencies. There is little economic reason for wholesale markets other than in US dollars.

Every once in while there is a suggestion to trade oil more often in Euro or other currencies. Trading oil in non-USD currencies makes comparing the price of oil across the world more difficult. If oil has risen by US$1 per barrel, how much should it have changed in Japanese Yen per kiloliter (the unit used on Japan's TOCOM exchange)? This may seem trivial but this causes an inefficiency which raises prices for Japanese consumers. The issue was discussed in the Wall Street Journal today:

"One of the reasons why oil around the world is traded not just in barrels, but in U.S. dollars per barrel, is because it allows the least amount of computation from one market to another," said Morgan Downey....author of 'Oil 101,' a book about the oil industry." (WSJ)

Crude above $70

Crude (NYMEX WTI) continues to make new highs for 2009 above $72 per barrel. I was quoted in the Wall Street Journal yesterday:

"Until OPEC increases production or consumers are reluctant to bear high prices we are going to see an increase in the crude price." (WSJ)