00:00Paul Sankey of Sankey Research writing, we have been super bullish on refining and think there is a major crisis
00:04here.
00:05We argue people are looking at the wrong oil price. Crude is not the issue. Gasoline, distillate and jet are.
00:12Paul joins us now for more. Paul, good morning. How small, how thin is the cushion? How bad are things?
00:17Well, it's just that the refiners, here, for example, refiners are running at 96% utilisation.
00:22How unusual is that, to run at 96%?
00:24That's where we want them and it's not unusual. I mean, for example, in Mexico, that would be 50%, you
00:29know,
00:29but it's an amazing performance and it does raise the risk around refining because obviously when they're running that hard,
00:34hurricane season coming up, El Nino, we went through a couple of heat waves and that causes issues.
00:39So I'm worried that there may be more problems. But the big idea is that basically wholesale gasoline is $140
00:46a barrel.
00:47Brent is at 90 and that margin is absolutely massive in terms of profitability.
00:51As I say, it's a margin, not a price, the $70 refining margin.
00:57And that's telling you that the tightness is in the refining system.
01:00So there's plenty, more or less plenty of crude, a lot of it driven by China's behaviour and by the
01:05SPR,
01:06which is another big turning point, by the way, because when we run out of SPR,
01:10which should happen around September, that'll massively change the dynamics of the WTI market here in the US.
01:15It'll be very bullish.
01:17When it comes to the products, which is most vulnerable right now?
01:19Well, jet fuel sort of sits above distillate. It's the hardest to make.
01:23And the industry's done an amazing job of raising their yield and really addressing the jet fuel crisis.
01:27And the reason they do that, it's the highest margin product.
01:30So jet fuel has actually not been the problem that we anticipated,
01:33basically because we didn't realise the refining industry could generate so much more jet fuel than they've been able to.
01:39The tightness at the moment, which is interesting, is the area that's normally not that tight, which is in gasoline.
01:44And that's where we're watching the inventories go way below the bottom of the range.
01:47And that's basically because they're pushing so much into jet and diesel that you're actually sucking down the biggest inventory,
01:54which is gasoline.
01:55And then, of course, as I said, you're drawing down the SPR very rapidly as well.
01:59But on the SPR, Energy Secretary Chris Wright says it's a, quote, long way from operational minimum.
02:04You think there's an issue coming in September.
02:07Well, that's depending on the rate that weekly it's being pulled down.
02:10But the refiners now find it a great deal because they're basically taking physical barrels.
02:14They're not paying for them, and they owe physical barrels in the future.
02:17And as you know, pay back more barrels, but in the future, which is a much lower, something of a
02:21lower price.
02:22So the refiners want the crude.
02:25There's a big debate that hasn't really been addressed by the DOE of where the bottom of the SPR lies.
02:31They put out a note about Cushing, which is a different thing.
02:34Cushing is metal tanks above ground.
02:35The SPR is a salt cavern that you hollow out by dissolving the salt.
02:40Every time you take it down and then push it back up, you push water underneath, and you dissolve more
02:45of the cavern.
02:45So there's actually a technical question.
02:47Is the cavern getting bigger?
02:48How low can it go?
02:49It's all basically not being addressed.
02:51Other than, you know, Chris Wright's, frankly, has a lot of very high reputation in the oil industry.
02:56But as an energy secretary, he's said some things that haven't turned out to be entirely true, particularly regarding the
03:01straights, poor moves.
03:01So I'm not sure that, you know, what he says about the SPR is really definitive, frankly.
03:06We just don't know when we're going to have to stop downloading it, basically.
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