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.

By Jim Cramer Mar 13, 2014 10:50AM

Oil well in west Texas at sunset © Brandon Jennings/Getty ImagesNot 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.


TheStreet.com logoThat'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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122Comments
Mar 13, 2014 11:53AM
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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. 

Mar 13, 2014 2:27PM
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Ukraine Tensions Rise ........... bullshlt banner.
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When we shoot ourselves in the foot by putting sanctions on Russian gas and oil exports and ban them giving them to China in effect.

Then West Texas Crude prices will go thru the roof

Mar 13, 2014 2:23PM
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Demand is down, supply is up, why are prices rising? The game is fixed, only the oil companies and the wealthy stock holders benefit!
Mar 13, 2014 1:03PM
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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

 

 

Mar 13, 2014 3:06PM
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Bob Marley T-shirt = Code for Zombie Apocalypse Targets 
Mar 13, 2014 12:08PM
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Thumbs up to Sharyl Attkisson for having some journalistic integrity. Good luck to you on your book.
Mar 13, 2014 12:35PM
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Today we are seeing Wall Street walk away from this market.  Seemingly good or at least benign news and now this opaque selloff is a classic walk down move.  This should raise your eyebrows.
Mar 13, 2014 11:21AM
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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?

Mar 13, 2014 12:18PM
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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 ?
Mar 13, 2014 1:40PM
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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 ....

Now take your israeli-firster - ANTI AMERICAN - goyim hating fat @ss back to tel aviv and stay the f*ck out of our business in the US.
Mar 13, 2014 1:58PM
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Steer clear. The economy is rapidly failing from financial tyranny. We are in some SERIOUS debt because of these markets... $20+ Trillion in national debt, $750+ Trillion in derivative debt, $5 Trillion in Quantitative Easing and it ALL is stuck in the markets that do absolutely NOTHING for the benefit of America. Business platforms are richer than ever in history, billionaires are omnipotent and the concept of globalization is backfiring because of greed. 
Commonsense says-- the gross lack of family-sustaining employment and steady wages wiped out the nation's ability to buy big ticket items like cars. Homes are failing as mortgage defaults rise and foreclosures are again a mounting concern. It's a FACT that the petroleum industry drills and pumps now expecting a world without wherewithal to buy it. 
Why yes, greed IS that stupid. Best to invest where you live in things that will sustain us. If your town isn't known for making anything in particular... you've got opportunity. If you don't start it up, your town won't have squat after the catastrophic collapse. Inevitability sucks. 
Mar 13, 2014 2:31PM
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All messages from ABS are brought to you courtesy of AIPAC and the Likkudi party of Israel and their beloved president nuttyahoo ....
Mar 13, 2014 3:42PM
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Cramer pumps out this article but another article says Americans are unable to afford new cars and non-gas-powered alternatives are gaining popularity out of necessity. 
The markets are liquidating because Wall Streeters are bailing. You are going to get STUCK with dead stocks not worth anything because all the assets have been sold off. GET OUT while you can take it in cash, not I.O.U.s. 
Mar 13, 2014 2:36PM
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Btw barry the burro bride ...it was a lovely young "tikkun" jewish lass who while reading your comments one day pointed out that you were almost certainly an aipac/likkudi shill - she told me you reminded her of many of her fat scummy uncles who lived in the NY area and coincidently some of whom work in the garment trade !!

So a little research on your posts and then your strange defence of israel trying to sink the USS Liberty and murdering many American Sailors confirmed it for me.

So do us all a favor and move back to israel ...you will be most welcome in Sodom and probably gomorrah too ....I am sure there is nothing too depraved for you.

Enjoy your matzoh ball lunch and I'll be back tomorrow my fat little friend.
Mar 13, 2014 1:32PM
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Hey Barry the Burro bride is back ...

How was the aipac conference last week? Did you get to meet your hero nuttyahoo ? 

What's this years  likkudi/zionist plan to bring down the American President ? 

Did you manage to get in any "wrassliin" with bibi and his bodyguards ?
Mar 13, 2014 2:03PM
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Funny how Cramer pumps out this spew, but another article says Americans cannot afford to buy a new car and non-gas-powered modes are gaining out of necessity. 
Mar 13, 2014 2:40PM
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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 !!

As I said before the only people I think you have knocked out are day laborers and teenage boys with roofies .....(perhaps akimoto/fattwat as well) ...

later numbnutz !! ;)
Mar 13, 2014 3:33PM
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Alias,go smoke some more weed.You wouldn`t last 5 minutes at the VFW.Crybabies like you and Mirage brain would get killed with your big mouths.
Mar 13, 2014 2:27PM
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Best place to be is the sidelines folks...Things very ugly down here, scumbags in complete control and are doing and undoing at will....Like we said this morning, there is no way this market was going to be up when manipulators own it all today...On and off the floor, same thing.....You can blame it on the flavor of last week, Ukraine or this week's flavor, China, or oil or because they didn't get any last night, doesn't matter...All it matters is that these crooks are making tons of cash this week and most Americans are losing tons. Have we given up? No. never but, do not be surprised if the Dow gets closer to -300 than to -100....More after the close. Cheating still pays on Wall Street
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