Refiners on the rocks, ain'tno surprise. Demand stinks, yet prices still rise. Got everything to lose so you sing the blues all the time. The Memorial Day weekend saw prices for gasoline hit the highest level for the year yet everyone is wondering how prices can go up when demand is so bad. Is it the evil oil companies conspiring to raise prices and soak already struggling Americans? Or is it the result of market forces forcing these higher prices upon is?
Those that blame the evil oil companies point to the fact that refinery runs have consistently been below normal. They say that this is proof of a conspiracy by refiners to jack up oil gasoline prices as they always do ahead of a holiday weekend. Well the truth is that if the refiners did not cut back on production many of them might have gone out of business. You cannot continue to produce a product that people are buying less of and expect to stay in business. And we have seen earlier this year refining margins go negative. In fact that this has been such a bad year for refiners that some of them might not live to refine next year. Those sentiments were also echoed yesterday by Chairman and Chief Executive Officer Rex Tillerson of Exxon Mobil at the Exxon annual share holder meeting. As Dow Jones Newswires reported Mr. Tillerson warned that, There are some marginal refiners that probably won't survive, (what is going on and that) they will go out of business. He said that the U.S. refining industry, which faces twin challenges of declining demand for motor gasoline and the potential that Congress will impose a requirement that refiners purchase costly allowances for their emissions of greenhouse gases. Of course if those refineries close and demand rises the oil companies will be blamed for closing refineries. And then we will be wondering why we did not build new refineries.
The good news is that I see signs that gas demand is increasing and margins are improving so maybe some refineries can hang on. Even big oil has been hurt by the credit crisis.There are good people in the oil industry and they create jobs and employ many people. Big oil has been good for the US economy. Big oil does well when the economy is doing well and the increase that we have seen in oil prices is a sign that the economy is recovering.
Yesterday the oil marketseemed to be gaining on those expectations. You could sense that even the most ardent bears were admitting that there have been some flaws in their thinking. You cannot just focus on current levels of supply and demand and believe there is a simpleequation that automatically equals a lower oil price. If that was all there was to it we could have computers spit out the price. The fact is that the price of oil, and gasoline for that matter, are determined by many more factors. Some are readily apparent and measurable and others really come down to what price someone is willing to pay. What risk is the buyer and seller going to assume? Will he ignore the risk's of a war breaking out even as North Korea goes on a missile shooting rampage? Should we ignore the fact that Iran is sending warships to the Gulf of Aiden? What impact Fed and government policy have on the prospects for future demand and its impact on the dollar that this barrel of oil is priced in? Even Rex Tillerson commented on how foreign-exchange fluctuations have contributed in the rise in oil prices. These are all factors that you cannot ignore yet the critics of big oil cannot seem tounderstand.
And somepeople can't seem to get that the American Petroleum Institute weekly energy supplyreport has been a very good indicator of our current supply and demand situation. The API reported that crude stocks fell by 2.8 million barrels, distillates rose by 1.4 million barrels, gasoline fell only by 758,000,crude imports rose by 41,000. The numbers are very supportive for crude and not so much for gas. Let's see if the Department of Energy and their weekly stocks numbersget caught up with the API. OPEC and Ali al Naimi says the world can afford $75 barrel oil and I believe that we are going to get close to finding out whether they are right. OPEC blames the speculators for the price increase on one hand but on the other hand says they are seeing signs that demand is improving. So what they are really saying is that the markets, supposedly driven by speculators, have accurately predicted a rebound in demand.What they are saying is that the mass collective thoughts and information of speculators and hedgers in the marketplace as expressed by their risk taking and defining of risk did a better job of predicting the future demand increase than they ever could!Speculators all over the world thank you for you acknowledgement of the value they bring to the global marketplace.
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