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Streetwise Professor

March 24, 2012

Bullbusters, Part I

Filed under: Commodities,Economics,Energy,Military,Politics — The Professor @ 8:24 am

This post on Information Dissemination is going viral (h/t R & LL).  I follow ID on my RSS feed, and it has good stuff about Navy inside baseball, but when it gets to economics, I suggest you take a pass.

Galrahn’s post attempts to pull together disparate strands of information to suggest that an attack on Iran is forthcoming: hence the virulence of the post among the conspiracy minded.  The first strand is information about deployments of US Navy assets to the Persian Gulf (when will they start calling it the Arab Gulf again?).  OK.  That could be legit.

Then he attempts to weave in strands relating to energy.  Starting with China:

So maybe this other relevant activity is just a coincidence, but even as a coincidence it is very interesting. Lets start with China.

The government on Tuesday raised retail prices for gasoline and diesel fuel for the second time in less than six weeks in an attempt to keep pace with soaring crude oil prices.

Chinese motorists are now paying $4.43 a gallon for 90-octane fuel — nearly equal to the $4.45-a-gallon average for mid-grade fuel in California, according to AAA.

The reason provided is found later in the article.

The increase should ease pressure on China’s two main refiners, the state-owned China Petroleum & Chemical Corp. and PetroChina Co., which are not allowed to pass costs on to consumers. The two have reported losing billions of dollars already because of soaring crude prices.

In other words, China is not having a supply or a demand problem right now, what they are having is a ‘losing money’ problem because of the current high costs – and because China price fixes their fuel, they must price fix it relative to the global market.

This is mainly gibberish.  The Sinopec/CNPC battles over pricing with the Chinese government are well-known and have been raging for years.  I’ve written about them on the blog.  This is hardly a new development, and certainly tangentially related at best to what is going on in the PG.

Galrahn then turns to Saudi Arabia increasing output and shipping it to the US.  He discounts the possibility that this is a political favor for Obama intended to keep prices down.  The basis for the discount is an alleged shortage of refinery capacity in the US.  Per Galrahn, the increased oil shipments will not depress gasoline prices in the US because we have a shortage of refinery capacity.  Thus, he concludes that the only reason for the shipments is to add to US stockpiles, which he interprets as a preparation for war.

The sole basis for Galrahn’s claim of a shortage of refining capacity is a Reuters article.  Uhm, data is our friend.

The EIA posts data on refinery capacity utilization.  The most recent data (from December) show that US PADD I (East Coast) refineries are operating at very low levels of capacity utilization.  Very low.  No lack of capacity there.  Indeed, the refinery closure mentioned in the article (Sunoco’s Philly refinery) is due to a lack of buyers.  If refining capacity were the bottleneck, the buyers would be lining up-if Sunoco even wanted to sell.

Refineries in ND, SD, and MN are operating above capacity.  But that’s no surprise.  It’s a manifestation of the Cushing bottleneck.  Refineries in OK and KS are operating at relatively high rates: another manifestation of the buildup of crude in the Midcon.  Gulf Coast refineries are operating at normal rates.

So: no evidence that capacity is the bottleneck in the EIA data.

Price data tell the same story.  Adjusting the Gulf Gasoline Crack for the LLS-WTI differential implies refining margins of about $7-$10/bbl.  The diesel crack is also about $10/bbl. The RBOB-Brent crack is around $15/bbl. These spreads are pretty weak, and hardly symptomatic of a shortage of refining capacity.

So the data completely undermine the basis for Galrahn’s theory.  Crude prices depressing refining margins are the problem, not a lack of refining capacity.  Which means that increasing crude supply available to East Coast and Gulf Coast refineries would reduce gasoline prices.

The fact that the US is exporting some refined products is also inconsistent with a shortage of refining capacity here in the US.

Without that, Galrahn’s big theory goes up in smoke.

That said, the Saudi’s dispatching of a “wall” of VLCCs is curious.  The natural destination of increased Saudi oil output would be Asia, to replace lost Iranian crude.  This does suggest some deal between the US and the Saudis, and one could weave a theory around that, given the Saudi fear and hatred of Iran.

But one cannot, as Galrahn does, bolster this case by claiming that there is no available capacity to refine the additional Saudi oil.

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9 Comments »

  1. Maybe all the furor over this poor dumb wannabe cop in Orlando still walking free is designed to distract the sheeple from the fact that Don Corzine still walks a free, Made Man of the Government Sachs Mob.

    http://www.bloomberg.com/news/2012-03-24/mf-global-s-corzine-ordered-funds-moved-to-jp-morgan-memo-says.html

    Comment by Mr. X — March 24, 2012 @ 9:39 pm

  2. Still crickets when it comes to commenters here willing to defend SWP’s Twitter buddy Cointelpro Reggie…how do you feel SWP about Reggie the goldbug reds hunter insulting all your Tea Party friends?

    Mittens, fiat money and eternal bailouts forever, amen.

    Reginald Quill ‏ @ReginaldQuill
    Reply RetweetedRetweet Delete FavoritedFavorite · Close Open Details
    The tea party won’t be helpful to Romney since they look like frothing ADHD klanners compared to Mitts’ positive demeanor.

    Comment by Mr. X — March 25, 2012 @ 12:43 am

  3. Is it possible the increase in imports of Saudi crude to the US has been driven by Motiva’s Port Arthur refinery expansion? I imagine Motiva is expanding its storage at the plant as well, although the company will not go into detail. The EIA’s weekly preliminary data last week showed a big drop in imports from Saudi Arabia — this could be a one off event, but will be interesting to track going forward.

    Comment by Jeff — March 25, 2012 @ 4:25 am

  4. @Jeff-could be. And since I don’t necessarily take what the Saudis say at face value, I’m taking a wait and see on this.

    The ProfessorComment by The Professor — March 25, 2012 @ 8:50 pm

  5. [...] some analysis of the data on HFT. Here and [...]

    Pingback by Monday Breakfast Links | Points and Figures — March 26, 2012 @ 4:08 am

  6. I have a question. If there is plenty of refinery capacity, why are politicians on both sides of the isle making the lack of refinery capacity in the US an issue? If it was only one side in politics, the answer would be obvious. But these town meetings have both Republican and Democratic Party members of Congress in them. I honestly don’t know why, but I tend to think there is smoke when Congress takes an issue seriously in a bipartisan way.

    Comment by Galrahn — March 26, 2012 @ 7:54 am

  7. [...] It all does seem very counterintuitive. On the one hand Saudi is saying there is no supply shortage and stocks are at record levels. On the other hand it’s sending more crude to the United States. On the one hand you have high oil prices and the constant mumblings of SPR releases. On the other hand much of the analyst and academic community insists there’s no need for any emergency action. [...]

    Pingback by FT Alphaville » Saudi Arabia resorts to Jedi mindtricks — March 29, 2012 @ 4:53 am

  8. [...] releases. On the other hand much of the analyst and academic community insists there’s no need for any emergency action. / So what is going on? / We’d be pleased to hear from anyone who can make sense of [...]

    Pingback by “Saudi Arabia resorts to Jedi mindtricks” on oil supply: FT Alphaville. : Jeremy Leggett's Triple Crunch Log — March 31, 2012 @ 11:51 am

  9. [...] releases. On the other hand much of the analyst and academic community insists there’s no need for any emergency action. / So what is going on? / We’d be pleased to hear from anyone who can make sense of it.” [...]

    Pingback by “Saudi Arabia resorts to Jedi mindtricks” on oil supply: FT Alphaville. | Trillion Fund Blog — April 3, 2012 @ 12:47 am

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