Dec 31 2008

Global Oil Sign Flashing: GASOIL Crack Spread Soars

December 31, 2008

The profit-margin for a refiner to turn a barrel of Brent oil into GASOIL is soaring. GASOIL has always been my favorite global tell on worldwide demand for Diesel. Considering that a 15.00 to 25.00 dollar profit margin was very attractive when Brent was at 130.00 dollars per barrel, that we are seeing 13.00-17.00 dollar profit margins with Brent at 40.00 is eye-opening.

Here is what we can conclude from this development: the supply/demand balance in Europe and Asia is being restored. It’s not just that oil supply is tightening. Demand for diesel is rising.

For the past 45 days the only bullish argument going for oil was price. By my figuring, at least 25% of global oil supply cannot be profitably lifted for 38.00 dollars a barrel in 2008.  But a case for oil based on price alone has been shown to be weak, under current conditions. For the market to make any real advance one had to see developments of the kind we are seeing today. The next brick in the wall will come when inventories at Cushing, OK–which drive price at the NYMEX–start to come down. That supply and demand are coming back into balance globally however is usually the first step to getting Cushing inventories down, as the world starts to send much less oil to the USA.

-Gregor

• Comments (18)
Author: Gregor Macdonald   Posted in: Oil   Tagged:  
  • Spencer

    Why are the forward GASOIL contracts for January, February, etc. much much lower?? Actual prices or just a presentation error?

  • Spencer

    Why are the forward GASOIL contracts for January, February, etc. much much lower?? Actual prices or just a presentation error?

  • gregor.us

    Hi,

    I'm pleased to see a backwardation come into the GASOIL spreads (not sure if
    you meant the spreads or the contracts) as it indicates a better
    supply/demand balance.

    I think ino.com got the spread calculation wrong, however, when they
    reported 31 December spreads as there appears to have been an incorrect
    marking of GASOIL too low, as Brent prices rose.

    If you are correct that GASOIL prices themselves are in backwardation, that
    is bullish too.'

    'G

  • gregor.us

    Hi,

    I'm pleased to see a backwardation come into the GASOIL spreads (not sure if
    you meant the spreads or the contracts) as it indicates a better
    supply/demand balance.

    I think ino.com got the spread calculation wrong, however, when they
    reported 31 December spreads as there appears to have been an incorrect
    marking of GASOIL too low, as Brent prices rose.

    If you are correct that GASOIL prices themselves are in backwardation, that
    is bullish too.'

    'G

  • http://www.nuclearphynance.com J

    Gregor, why are gasoil (and heating oil) cracks so bid (relative to their own history or relative to the gasoline crack)? European and Asian demand were cited as the reasons earlier this year and in late 2007. But surely the fuel economy appeal of diesel as for cars should have lessened now that gasoline is back to “reasonable” levels? And surely the industrial demand for diesel should have declined/be declining commensurate with the general decline in global industrial production?

  • http://www.nuclearphynance.com J

    Gregor, why are gasoil (and heating oil) cracks so bid (relative to their own history or relative to the gasoline crack)? European and Asian demand were cited as the reasons earlier this year and in late 2007. But surely the fuel economy appeal of diesel as for cars should have lessened now that gasoline is back to “reasonable” levels? And surely the industrial demand for diesel should have declined/be declining commensurate with the general decline in global industrial production?

  • gregor.us

    But surely the fuel economy appeal of diesel as for cars should have lessened now that gasoline is back to “reasonable” levels?

    I don't understand this framing. I am not aware of any ability the world has to switch quickly between diesel and gasoline.

    My view is as follows: the world chose diesel years ago, and the world runs on diesel. It's only the US that is still very concentrated on gasoline.

    I suspect I am unable to truly answer your question because I don't understand it or the assumptions in it. I certainly agree industrial demand for diesel has dropped recently. I also hold the view that here in the US, we have seen a 3rd year of switching away from Heating Oil to NG on the East Coast.

    For me it's really simple: Brent has been higher bid than NYMEX because NYMEX still has antiquated pricing off of inventories at Cushing OK, and Brent tells the story better of global supply/demand.

    HTH.

    G

  • gregor.us

    But surely the fuel economy appeal of diesel as for cars should have lessened now that gasoline is back to “reasonable” levels?

    I don't understand this framing. I am not aware of any ability the world has to switch quickly between diesel and gasoline.

    My view is as follows: the world chose diesel years ago, and the world runs on diesel. It's only the US that is still very concentrated on gasoline.

    I suspect I am unable to truly answer your question because I don't understand it or the assumptions in it. I certainly agree industrial demand for diesel has dropped recently. I also hold the view that here in the US, we have seen a 3rd year of switching away from Heating Oil to NG on the East Coast.

    For me it's really simple: Brent has been higher bid than NYMEX because NYMEX still has antiquated pricing off of inventories at Cushing OK, and Brent tells the story better of global supply/demand.

    HTH.

    G

  • Spencer

    Sorry, I meant the spreads… I was just referring to the table you had linked to. If these charts are accurate, it doesn't look like we're seeing backwardation in the contracts: (https://www.theice.com/productguide/productDeta…)

    Thanks!

  • Spencer

    Sorry, I meant the spreads… I was just referring to the table you had linked to. If these charts are accurate, it doesn't look like we're seeing backwardation in the contracts: (https://www.theice.com/productguide/productDeta…)

    Thanks!

  • http://www.nuclearphynance.com J

    “I am not aware of any ability the world has to switch quickly between diesel and gasoline.”

    At least in the UK, the decision to buy a car that runs on diesel or “petrol” is generally economic. Presumably the economic rationale for buying a diesel rather than a petrol car has now diminished as petrol prices have come down. I hope that clarifies my original point.

  • http://www.nuclearphynance.com J

    “I am not aware of any ability the world has to switch quickly between diesel and gasoline.”

    At least in the UK, the decision to buy a car that runs on diesel or “petrol” is generally economic. Presumably the economic rationale for buying a diesel rather than a petrol car has now diminished as petrol prices have come down. I hope that clarifies my original point.

  • gregor.us

    I see. Thankyou. Now I do understand.

    OK. My view based on historical trends is that that is the kind of structural switching that takes place over a much longer period of time. That outsized spread that the world experienced between Diesel and gasoline would need to be sustained for longer.

    This is very tricky stuff to analyze–specifically–consumer trends in diesel vs petrol autos keying off price trends. I generally don't attempt to figure it out, and leave it to others.

    What I do pay attention to however is that distillate remains the flexible fuel especially for developing nations as it's a lot easier on their Refining complexes.

    HTH

    G

  • gregor.us

    I see. Thankyou. Now I do understand.

    OK. My view based on historical trends is that that is the kind of structural switching that takes place over a much longer period of time. That outsized spread that the world experienced between Diesel and gasoline would need to be sustained for longer.

    This is very tricky stuff to analyze–specifically–consumer trends in diesel vs petrol autos keying off price trends. I generally don't attempt to figure it out, and leave it to others.

    What I do pay attention to however is that distillate remains the flexible fuel especially for developing nations as it's a lot easier on their Refining complexes.

    HTH

    G

  • Joe

    Gregor, what do you mean “the world chose diesel years ago”? Can you defend this point?

    Thanks

    J

  • Joe

    Gregor, what do you mean “the world chose diesel years ago”? Can you defend this point?

    Thanks

    J

  • Joe

    Gregor, what do you mean “the world chose diesel years ago”? Can you defend this point?

    Thanks

    J

  • Joe

    Gregor, what do you mean “the world chose diesel years ago”? Can you defend this point?

    Thanks

    J