It’s not about the size of the sea, it’s the motion of the ocean.
Here we are about to have another scintillating week of EIA oil inventory stats. Tomorrow we’re likely to see that refineries across America are slowing down into the maintenance season. What is making this maintenance season slightly different than the past is that there’s more going on than just a little fixer upper. We spent the weekend with a friend who happens to be in pipeline inspection services for the downstream sector and he had some interesting news.
He said that despite all of the work being done this spring season, a lot doesn’t have to do with typical maintenance. He said a lot of the work is within the processing of the refineries. In other words, it’s likely that U.S. refineries are gearing up to take more light crudes. This means that U.S. crude oil producers are not going to lose out like the media is playing out and foreign importers should be worried.
Since 2005 the U.S. refining system has been recalibrated to take a heavier crude slate. It’s hard to figure out what the percentage is because some refineries take a blend that uses both, but they have been pushed to blend with heavy post 2005. Back between 2003 and 2005 a funny thing happened in the crude oil market. The demand for light crude was growing quickly across the world. The reasons were simple; light crude provided more yield and it was easier on the refinery operations. Outside of China, most refineries needed this light stream for all intensive purposes.
China had the benefit of smaller refineries (<250K b/d) and were built to take cheap crude, emissions be damned. Here in the U.S. our biggest (>300K) had to go through some heavy retooling to handle a heavier slate, but as refiners were seeing the demand growing for light crude, the tight supply and the differentials between the two widening to nearly double digits, the future was clear. Change now and stay relevant into the future. It was become the U2 of refining or end up like the grunge scene of the 90s.
Now the economics are there again and it’s a clear and simple future. Well for sure at least 10 years out and probably more. Light crudes are not only going to stay in abundance, they are here in America. The demand for this grade of oil has the ability to float our crude production in the United States and even has room for it to grow. The other factor here is that the U.S. refining system needs to grow it’s yield. We are expecting some major moves in refinery creep (increase in capacity) as expansion has been a priority, but more importantly will be the yield increase of the products.
Expanding a refinery is a great task, but if we can engineer more yield by switching crude grades...happy days for the teeming millions. It’s an emergency measure because our demand for gasoline will be off the chart this year. We’ve added more jobs and we’re seeing an increase of wages. That means that the two car family will be able to afford three. It means that the average worker is making more to spend at the mall and make more than a trip or two more than normal to get that done.
It means that if I am wrong about all of this, we’re going to have to increase our gasoline imports into summer and that’s going to begin to sepa-rate high gasoline prices from low cost crude oil. That’s going to go over well in the PR department.