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absolutely right Clyde. Flying a computer just
isn't the same as going to a platform by helicopter.
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----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Clyde Lee
To: <A title=realtraders@xxxxxxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxxx
Sent: Wednesday, June 06, 2001 2:33
AM
Subject: Re: [RT] CHV, Refinery margins
etc
The wonderful part of this analysis is
that there is no
blame assigning.
Nothing but simple accounting of the
facts of the energy
business as it applies to oil.
I started in this business in 1955 and
have been through
several "boom/bust" cycles which were
characteristic of
the business in the past -- certainly the
companies have
found ways of ameliorating the boom/bust
characteristics
of the business with good financial
planning.
BUT, it ain't near the fun it was when we
really depended
on the "wildcatters" for
excitement.
Clyde
- - - - - - - - - - - - - - - - - - - - - - - - - - - -Clyde
Lee
Chairman/CEO (Home of
SwingMachine)SYTECH
Corporation email: <A
href="mailto:clydelee@xxxxxxxxxxxx";>clydelee@xxxxxxxxxxxx 7910
Westglen, Suite 105
Office: (713) 783-9540Houston, TX
77063
Fax: (713) 783-1092Details
at:
www.theswingmachine.com- - -
- - - - - - - - - - - - - - - - - - - - - - - - -
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----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
<A title=onwingsofeagles@xxxxxxxxxxxxx
href="mailto:onwingsofeagles@xxxxxxxxxxxxx";>onwingsofeagles@xxxxxxxxxxxxx
To: <A
title=realtraders@xxxxxxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxxx
Sent: Tuesday, June 05, 2001
19:19
Subject: [RT] CHV, Refinery margins
etc
Regarding the comment from Norm about refinery margins
being more important to CHV versus the absolute price of gasoline etc/
and Don's attempt at the charting of this spread...Here's some
more info on all that:a/ There are 3 types of companies in the oil
business: The oil extractors, the oil refiners, and the oil
marketers/shippers (pipeline companies, gas stations etc) - and of
course the ancilliaries that support the whole infrastructure like
Schlumberger.b/ In the whole food chain, it doesn't matter to
anybody what the absolute price of ANYTHING is - not crude, not
gaso/heat, not any of the other derivative products & chemicals. The
only place where price of crude oil makes a difference is to those
countries sitting on reserves, whose revenues go up/down with Crude
prices. c/ The whole food chain makes money off of the spreads
between demand time pricing & supply time pricing, the
crude-to-product conversion pricing, and the tactical retail market spot
pricing relative to spot futures pricing.d/ Most companies in
this sector experience cyclicality, of boom-bust proportions. The larger
ones have learned to offset some of the cyclicality with either hedging
their margins or buying into upstream/downstream food chain capacity.
They have also learned to store money for bad cycle times and to use it
to their advantage to do the acquisition activity during that bad cycle
time. The smaller ones running undercapitalized operations during boom
times either get wiped out or get bought out during the busts.e/
Therefore, almost everything we see these days in the media is hype. Gas
price $2/gal at retail incl tax ($1.00 wholesale, which is pretax, by
the way) doesn't do diddly squat for a refinery if its crude cost was
higher than $42/barrel, and that's at cost-of-production.f/ In
reality, therefore, refiners make money if the conversion from Crude Oil
into refined products (heat, gaso, lots of chemicals) can be resold for
greater than the cost of the crude plus the cost of conversion plus the
overhead of maintaining/running that conversion machinery, people,
electricity, storage of crude etc. That conversion process is
collectively referred to as "Cracking" and the resultant margin desired
to make money is called the "Crack". The two products on which futures
are traded in America are Heat & Gaso, so we have the Heat Crack and
the Gas Crack. g/ However, once a barrel of crude is emptied into
the hopper, you don't get only heat or only gaso as the output. You end
up getting both, and with some tinkering you can get more of this or
less of that, but you gotta live with both (and all the other
chemicals).h/ Therefore the market compensates the refiner for
producing heating oil in gasoline season, and the reverse in winter - by
building in a storage + financing that storage component. i/
This compensation sets a "floor" on the crack margin that you will get
to see on the exchange traded derivatives. Rarely (like it did in 99)
will a crack trade negative. If that happens beyond bad data and beyond
a single session, then the market is paying the producer to produce less
of that commodity, but the market will in turn give the other crack
extra margin because sub-standard margin on both products will make the
producer stop producing altogether.j/ This flows through with a lot
of financial filtering to the operating margins statements of
refineries, best seen at SEC-Edgar.k/ Mr Jennings commented on
seasonality, and this year we had two simultaneous occurences: The
driving season arrived as it usually does, and the market gave gasoline
crack a lot of margin - of the type seen rarely in history. This
happened long enough for the financial engineering geniuses at
refineries to not shield it too much, hence you see all refineries
across the board showing huge sequential and yoy gains.l/ Why
the market gave the gas crack so much boost is not my place to answer,
but it did, and thence the profits. These typically get hidden in the
larger, diversified companies like Shell, Exxon, Chevron because they
are typically hurting elsewhere (which is why they diversified in the
1st place). In this year, they are hurting from inability to find
pricing power for their Crude oil inventory, they are hurting from their
inability to get more crude out of Indonesia due to unrest relative to
the crude they get out of Saudi (there is a 22% cost difference) or
elsewhere. This hurting is in relation to LAST YEAR's prices, of course
- on an absolute cash flow basis they are making out like bandits. They
are hurting because there is a demand for simultaneous capital outlays
in pipelines, in refining, and there is a high profile energy crisis
fostered by entities and events outside their control, but they get
blamed for it anyway (Big Oil). And they know that the entire food chain
gets cyclical pricing power - in that they are making out like bandits
this year, but that does not guarantee pricing power even this
winter.m/ For Don Ewers and anybody else interested in charting
cracks: It may pay for you to chart the contracts' equity values against
one another, instead of just contract a price from quote feed minus
contract b price from quote feed. You'll still get the same picture,
but you'll understand better how much/less the refinery component is
making this year.n/ Supply relationships between different
months are also measurable and tradable, and they are economic reality
based. This is why you will see gasoline in latter months of summer
being traded at lower prices than the front month gaso, there is no
shortage in the intermediate term even though shortages may develop
today/next week. Whatever shortages exist today/next week will be easily
taken care of by the time the back month contracts become front month
contract - after all, this is a sub-100% capacity utilization industry.
This is probably why Don is unable to match his Wave 3's for contracts
out into the summer - and this is why continuous contracts really don't
add value to the trader of energy derivatives. Perhaps the grain
traders would understand this because they have to deal with winter
crop etc details.I hope this gives some perspective. It
may pay, therefore, to trade Chevron for Chevron chart reasons instead
of trading it due to refinery margin expansion reasons. However, Valero
is a different kind of energy company, so there the impact of refinery
margins may be the better predictor of margin
expansion/contraction.More info on cracks etc are at Nymex's
website,
www.nymex.comGitanshuTo
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