Well I was coming into Monday with all of these ideas about the big picture.
There’s the failed Halliburton/Baker Hughes deal. The crushing blow from Japan that just won’t try to stimulate it’s way out of a decades long recession. We can throw in the default from Puerto Rico and the mess in Libya that has to take back a cargo of it’s own crude that is now deemed illegal. Ah, that’s just stuff for the amateurs. Those are headlines that are already out there and any doof can just write those up.
I provide more for the teeming millions and I said I’d come back with something good this week and here I am. Granted I am going to have to squeeze this in a short week because I will be taking off on Thursday and Friday. Every once in a few years, I like to really take a vacation. This is it. I’ll always be close by, so don’t panic. I just won’t be up at 4am ranting and raving like I’m about to win the GOP primary in Indiana.
So we’re going to get back to $50 oil. It’s a given and that’s how this goes. Hearing about $20 is like hearing another damn Prince song. Look, we all get it. There was a time for mourning, but it’s over now and we don’t need the hype any more. The thing that most will be talking about now is when do we get to $60 or $80. How about $100? Here’s the thing, we never will see $100 oil ever again. Never. It’s not that U.S. fracking will be the reason either.
It’s the fact that we have nothing to do with all of that crude. The truth is nobody does. And because of this, crude oil is only worth a simple fair value. This value has nothing to do with production, it has everything to do with demand, but that demand is limited. For what it’s worth, if you had a barrel of crude, you would have 42 gallons of a worthless liquid. To anyone, there is nothing that you can do with crude oil.
Here’s where I’ll start. The only people that want or need that crude oil are refiners. To the consumers across the world, all they want is what the refiners make after they process that crude. Now bring it back to the beginning, all we have in America is 18.1M b/d of operable capacity.
We have a system that has been running higher than we’ve ever seen in the two years. Starting in late 2014 to date, we’re running a record 16.1M b/d. On paper it looks like we have about 2M b/d of spare capacity, but that’s debatable. We hit over 17M b/d last August for two weeks in a row, but we’ll shatter that this year. So here’s the big problem; when we do see our capacity for refining at it’s limit, what do we do with the crude that’s still coming in?
In a perfect world, let’s say that we are producing 10M b/d in a >$60 barrel of WTI. Now with Brent at a premium of say $5, we’re bringing in about 8M b/d. So nothing different there. Now with our refineries still consuming less that what is available, there’s a point here where we can’t increase the demand for crude. Refining capacity is limited globally and there’s been no development of refineries, spare for a project here or there in the Middle East.
That’s not going to help crude oil either because those countries that have increased refining capacity already have high production rates of crude oil. There’s no money to be made using your own supply. Now the flip becomes can they supply refined products at a premium good enough to stay in this loop. Oh the madness is just beginning.