crude down a little, refiners up big, wtf?

[sammyg2]

Another one for the "don't make sense" file.

Crude futures dropped a little today but pure refiners are up big-time after a long downward spiral. VLO is up over 5%, TSO is up over 8%, sun is up 5%.
Profits are down or negative, crack spreads are in the toilet, there is nothing positive except the glimmer of hope that crude will come down big. If that happens, these refiners are going to be crawling in money.

It's as if the speculators are jumping to the other side of the fence all the sudden as if they know something we don't.
I've suggested for a while that the oil bubble will eventually burst violently and when that happens the independent refiners Will be a smart play. I've also suggested that a few key brokerage houses and keeping the oil aloft artificially. Are they ready to cut and run? Only time Will tell.

If there is not a decent down correction in these guys by close tomorrow, I'm going long.
I'm not ready to go all in yet, maybe 20% at most. My crystal ball is in the shop because it has a crack in it.

[legion]

Originally Posted by sammyg2

It's as if the speculators are jumping to the other side of the fence all the sudden as if they know something we don't.
I've suggested for a while that the oil bubble will eventually burst violently and when that happens the independent refiners Will be a smart play. I've also suggested that a few key brokerage houses and keeping the oil aloft artificially. Are they ready to cut and run? Only time Will tell.

We can only hope.

We can only hope....

[Porsche-O-Phile]

Even if the price of crude crashes, you honestly think that'll translate to lower prices at the pump?

Phat chance.

[widgeon13]

A revealing article in NYTimes yesterday, get through the first couple of paragraphs and some good points.

http://www.nytimes.com/2008/05/11/business/11every.html?_r=1&scp=1&sq=Greenwich&st=nyt&oref=slogin

[Les Paul]

widgeon13 we can only hope.

[sammyg2]

Originally Posted by Porsche-O-Phile

Even if the price of crude crashes, you honestly think that'll translate to lower prices at the pump?

Phat chance.

Yes, I do think they will and I'll tell you why:
The price of crude and the price of gas are not directly tied to one another but they do influence each other.
Right now the refiners are scaling back production to cut their losses. Most are losing money on every gallon so it just makes sense to make a few less gallons, right?
if the price of crude falls quickly we will see a quick drop in gas prices, after about 60 days. not right away because oil is bought way ahead of time so the effect takes a while.
Now, suppose the oil refiners have had terrible quaters over the past 6 months and are really nervous. Then the price of crude falls so the margins improve quite a bit. what do they do? crank up production as fast as possible to try and recoup the recent losses. They make hay while the sun shines but the increased supply drives the price down, but with about a 1 or 2 month lag.
If the price of crude falls below $90 in the next two weeks, we'll see $3 a gallon gas or lower before labor day.
If it goes to $75 where I think it belongs, I'd bet we'll be paying $2.75 a gallon before the end of summer.
After all, the difference between $125 per bbl and $75 per bbl of crude is $1.20 a gallon, and because there isn't a 1 to 1 relationship gas could fall further.

[Porsche-O-Phile]

While I don't disagree with you on the economics behind this (it all makes sense), the obvious question to me is, "if the price at the pump ultimately is set by 'whatever the market will bear', and the market has been tested and willing/able to bear prices in the $4-$5/gallon range, what possible incentive is there to lower prices?"

In other words, I suspect that while supply goes up and refineries breathe a collective sigh of relief, maybe the production price drops, but is there any incentive to drop the wholesale (or retail) prices on the part of the distributors or retailers? Not really. They take that difference and put it in their pockets. Good times for them.

I suspect if anything it'll be the usual "rocket and the feather" situation.

[sammyg2]

Just for reference, here's what 9 independent refining companies did today:
Tesoro up 9.97%
Alon up 8.95%
Holly up 7.73%
Western up 6.44%
CVR up 6.07%
Valero up 5.54%
Sunoco up 4.97%
Delek up 4.83%
Frontier up 4.72%

[sammyg2]

Originally Posted by Porsche-O-Phile

While I don't disagree with you on the economics behind this (it all makes sense), the obvious question to me is, "if the price at the pump ultimately is set by 'whatever the market will bear', and the market has been tested and willing/able to bear prices in the $4-$5/gallon range, what possible incentive is there to lower prices?"

In other words, I suspect that while supply goes up and refineries breathe a collective sigh of relief, maybe the production price drops, but is there any incentive to drop the wholesale (or retail) prices on the part of the distributors or retailers? Not really. They take that difference and put it in their pockets. Good times for them.

I suspect if anything it'll be the usual "rocket and the feather" situation.

The key flaw in that logic is that the refiners do not set the price!
They make a whole bunch of gas and auction it off to the highest bidder, jusdt like e-bay except it happens every single day. Sometimes 24 hours a day. Some wholesaler is always negotiating with 2 or three refiners playing htem against each other to try and get a better deal.
Thjey sell it to the jobbers who sell it at the pumps.
If there is a whole lot extra available the wholesale distributers will gobble it up at a huge discount. Then they have to turn it, and the faster they turn it the more money they can make.
So they offer it to the stations as a discount, so the station owners buy a bunch and they have to turn it fast. Especially once the price starts to fall. they never want to get caught with a bunch of more expensive gas in the tanks when the price is falling because you lose on the inventory. Dump dump dump.

[jyl]

Seeing some "technical analysis" chartists calling for 30% pullback in crude.

How much is TA worth - varying opinions - but when prices get disconnected from fundamentals, traders start using TA.

[Porsche-O-Phile]

Makes sense to me. . .

Here's to hoping. . .