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Wednesday, June 11, 2008

Stricken Nearly Blog-Dumb By Awe

PetroChina is selling more bonds to cover their expenses, such as refinery losses. As you'll note from the article, Sinopec is getting hurt worse by the mandate to sell oil below cost. But if you look at PetroChina's last quarterly report, available from their website here, you'll see that oil prices were biting cash flow in the first quarter.

(These reports are fun to read, especially the narratives. How about "Faced with the changes in the operating environment, the Company planned in a scientific manner and responded actively, and realised a continuous development in the principal operations of the Group, stable production and operation, steady increase in the output of major products and further enhancement of the sustainability of the Group. Excluding the impacts resulted from policy factors such as the special levy on domestic crude oil sales and the macro economic controls on the prices of refined products, the efficacy of the Company's operation continues to maintain at a higher level.")

The bottom line is that China will have to raise domestic fuel prices somewhat, and probably will do so this summer. The growth in demand is coming mostly from countries such as China and India, and as prices increase demand growth will be constrained.

The oil moves do not make any sense whatsoever, and I begin to fear that this will end in many broken hedge funds.

Oil rose on the US inventory report, but if you look at stocks of products, they appear to be inline with demand, and the summer peak season isn't peaking very well. The contrast with the previous year's inventory is a bit misleading, because there was an oversupply at the pricing then in effect, which suppressed pricing power. Therefore refineries were going to cut production and buys this year:
Petroleum Stocks                                                           % Chg fr
(Million Barrels) 06/06/08 05/30/08 06/06/07 Prev Week Yr Ago
Crude Oil (Excluding SPR) (9) 302.2 306.8 349.5 -1.5 -13.5
Total Motor Gasoline 210.1 209.1 203.2 0.5 3.4
Reformulated 2.5 2.1 2.1 19.0 19.0
Conventional 103.1 103.5 112.9 -0.4 -8.7
Blending Components 104.5 103.5 88.1 1.0 18.6
Kerosene-Type Jet Fuel 39.9 39.8 41.4 0.3 -3.6
Distillate Fuel Oil (7) 114.0 111.7 124.6 2.1 -8.5
15 ppm sulfur and Under 71.4 70.0 67.9 2.0 5.2
> 15 ppm to 500 ppm sulfur 18.8 18.6 23.2 1.1 -19.0
> 500 ppm sulfur 23.7 23.1 33.5 2.6 -29.3
Residual Fuel Oil 39.5 38.2 36.5 3.4 8.2
Propane/Propylene 38.5 38.0 37.8 1.3 1.9
Unfinished Oils 86.5 86.8 91.9 -0.3 -5.9
Other Oils (10) 138.1 138.1 145.1 0.0 -4.8

Total Stocks (Excl SPR) (7) 968.7 968.4 1,030.0 0.0 -6.0
Crude Oil in SPR (11) 704.3 704.1 690.3 0.0 2.0
Total Stocks (Incl SPR) (7) 1,672.9 1,672.5 1,720.3 0.0 -2.8

I read something today that stated crude oil in China trades at a market value of $75/barrel. Hum...

We have a weak banking system, an energy tax (have you looked at home heating oil? Gunna be a cold winter) a food tax, and central banks are hell bent on raising interest rates. Throw in a tax increase. What do you get?

A Depression. Brought to you be the expert on the subject, Ben B!!

My solution? Drill, drill and drill. Also, eliminate speculation in commodities. This will make them more volatile, but should dampen the price.
Yeah, if people don't wise up it's gonna be uglier than anyone dreams. The CBs simply cannot control inflation now by raising interest rates. The entire thing will bust on its own. Commodities are always the last bubble. Unfortunately, it will bust worldwide.

At these prices the whole thing should tip over by late summer at the latest. Raise interest rates? Energy is sucking all available capital into its maw like that strange huge paramecium thingie on Star Trek.

In terms of domestic policies, the congressional Dems appear bent on committing suicide. We may need a third party very quickly, because the GOP needs a firm opposition. We're way too close to becoming a one-party state.
MoM,the USA is effectively a one party state with an "elected" dictator.
When the oil bubble pops the speed and volatility are indeed going to break any number of leveraged speculators. It will be a colossal mess that will lead to tighter rules on futures/options. Chicomm $75 oil is not far from my fair value $85 oil (that includes disruption/politics BTW). I won't believe $135 oil until somebody actually starts paying $135 for delivery. Ugly game of chicken out in the pipelines.
Rob - There is certainly a delay because of contracting, but April imports averaged $96.81. Link.

Of course, at that price it is just about economically viable to pee into a barrel and generate your own electricity with solar and urine inputs, so I do think the break is coming soon. Late this summer is my guess.
I've long said that sustained $100 (c. 2002) or $100 (c. 2006) oil was a tipping point where massive substitution would recieve investment; tar sands, oil shale, plasma coal, photovoltaics, wind/sea, etc. For that reason I also have long said the oil exporting countries would never let things get to that point and lo and behold the oil countries are talking down oil as being too expensive. You are right. I implied it but you said it out loud; people aare balking at $96.81 oil. This is a smart group but I doubt 55 of the general population understands the spot price vs. the refinery price paid.
I'd love to understand the difference between the spot price and refinery paid price. Please explain, or point me in the right direction.
An extended period of prices above $100/bbl is not having much effect on one of the real driver of future oil prices, which is stocks to use ratios. Crude days forward cover continues to scrape along at very low levels, the latest a scant 19.8 days' cover: http://tonto.eia.doe.gov/dnav/pet/hist/w_epc0_vsd_nus_daysw.htm

This stuff is tight, tight, tight. Now the real question is, what price to you have to pay at the margin to add a surplus barrel to the float? It appears to be lot higher than what Larry Kudlow wishes it were.
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