Why West Texas crude is such a smoking deal
A lack of pipe and a shortage of refinery space are creating a discount on an already discounted oil price. Refiners are making a killing, and there's no end in sight.
Not enough pipe. Not enough refinery space. Too much oil. That's the story of the Permian oil field, where production has increased by an astounding 400,000 barrels a day in the past two years.
That has lowered the already discounted West Texas Intermediate price. How big is it? Right now, West Texas is selling for a discount of $10 to Brent -- $98 vs. $108 -- and then Permian is selling at an additional $8 decline to the $98 price as Permian producers duke it out for pipeline space and take discounts galore to do so.
That's behind the remarkable resurgence of the refiners as the ones on the Gulf are buying $90 oil and then selling that refined product for the world price, making a killing in the process. It's this glut of Permian oil that's causing the margins to expand at a breathtaking pace.
Dan Dicker and I had a good sit-down about the price differential. What you need to know is that, according to RBN Energy, the source I use for all things energy in this country, the discount is not going to go away anytime soon. In fact, it should get worse before it gets better, because the oil is being pumped in increasing amounts and new pipe that can help alleviate the space constraints won't be available until at least June. That means three more months of wide spreads and three more months of outsized profits for Alon (ALJ), Marathon Pete (MPC) an HollyFrontier (HFC), all of which reside at the other end of the pipe from the Permian.
I am not a big fan of the refiners, because they are so hard to gauge. What happens when not one but two new pipes open in June? Will the differential close and all of the momentum money pour out of these stocks? Will the pipes work right all at once? Is the oil increasing at such a pace that it will quickly overwhelm the new pipelines?
To me, it will be a game of chicken come June.
But there is no doubt that the estimates for the refiners are too low because of this Permian discount to the discount. These refiners all report in the first week of May. I bet they run right into them as more and more people figure out the discount. But then you would have to jump ship when they report, because they will have to say that the two new pipes that open in June could eliminate the discount to the discount.
Sounds like a good trade on any weakness that comes from the price of West Texas crude stabilizing here, simply because it isn't emblematic of either the real price they are getting in the Permian or the world price sent in Brent. But it is emblematic of windfall profits for the refiners as pipe pace is tight, no new refineries have come on since 1976, and we just keep finding more and more oil in the Permian every day.
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don't worry - the oil companies know how to control and fix pricing. refineries or not, pipelines or not, all prices will go up along with profits.
Then West Texas Crude prices will go thru the roof
No red banner for the down market. They don't know what to say........... How about.
Good Financial News (true or false) Points to No Chance the Fed Will Stop Tapering
Petroleum indeed is the economic sleeper at present. Who woulda thunk we would be in this position to challenge pricing just a few years ago. Talked to a friend whose brother is a driller and he says it is nuts. If you don't leave the back porch light on overnight you might wake up to find someone drilling in your backyard come morning. The pressure for refiners is over the top. So the Cat that bought all the calls that was mentioned a few weeks ago, I forget the issue, may be correct?
Does anyone get the feeling that the cgt1 fellow has a small army of lego people that he sits and talks to about the stock market ?
Ah Barry ...sorry to break your rotten little zionist heart but I am a catholic ...confirmed back in the day but have not been to mass for about 15 years ....
Oh and btw I'll be in Teske's German pub in San Jose tomorrow and Jack Rose in los gatos saturday - I believe you said you can knock me out !!
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Stocks drift lower and bonds are hit as investors await the Fed. Prepare for higher volatility this week.
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