Urgent request--am I drunk or does this make no sense at all?
ANALYSIS-Oil price surge obscures emerging refinery cushion
SINGAPORE/NEW YORK, Oct 17 (Reuters) - Oil's thundering rally
over the past six days may be masking a bearish turning point for
the market -- the recovery in refining capacity, which could end
a three-year squeeze on global fuel supplies.
If, as many analysts expect, refiners manage to bring new
plants onstream on time next year, the world may enjoy its
biggest margin of spare fuel supply capacity in years, relieving
one of the major risk factors that has lifted oil prices.
It would also put the market's spotlight back on crude oil
fundamentals, potentially improving OPEC's ability to put a cap
on prices after years in which the promise of additional crude
meant nothing to refiners unable to process.
"I think we're coming to a point where we're turning the
corner to a crude push rather than a product pull, which
obviously isn't good for margins," says Jeff Brown, managing
director at FACTS Global Energy, a consultancy that advises oil
companies about investments in the refining sector.
Traders say the past week's activity has shown that crude --
not oil products -- is in the driver's seat for now. U.S. crude
catapulted 10 percent to a new record high of $88.20 a barrel.
The premium for heating oil futures over crude <CL-HO1=R> has
dropped about $2 to nearly $10 a barrel as crude rallied;
gasoline's premium <RB-CL1=R> has languished at only $4.
Even as the market seems to be signalling that fuel supplies
are adequate, prices have roared higher on a surge in investment
funds triggered by the threat of violence in northern Iraq and
fears over insufficient crude oil supplies this winter.
"Speculation on crude is leaving fair value far behind," said
Tim Evans, energy analyst at Citigroup Futures Research. "Demand
is weak and crude oil could roll over and die at almost any
juncture here."
The product lag is partly due to the seasonal autumn ebb in
consumer demand, which could quickly reverse this winter.
But some analysts say it may also be the first sign that the
world's refiners -- whose underinvestment laid the foundation for
oil's meteoric rise -- are finally catching up with demand.
FACTS estimates that 2 million barrels per day (bpd) of basic
crude refining capacity and 1.5 million bpd of cracking capacity
-- upgrading products into premium fuels such as gasoline and
diesel -- will come onstream in Asia and the Middle East in 2008.
That outstrips regional demand projected to grow by 1.2
million bpd, good news for an oil market on edge over a shortage
of refined fuel supply, bad news for refiners such as Valero
Energy Corp VLO, Europe's Total <TOTF.PA> or Japan's Nippon
Oil Corp 5001.TK who have enjoyed booming profits.
LONG IN COMING
The capacity growth is no surprise -- the margin boom since
2004 provoked a wave of very public investment in the notoriously
cyclical sector, especially in Asia and the Middle East.
The situation has already improved from a low point in 2005,
when global refining capacity exceeded oil demand by only 3.4
percent, less than half the "supply cushion" that existed in
2001, according to BP's Statistical Review.
Excess capacity expanded slightly to 4.2 percent last year,
and greater relief may be emerging sooner than expected.
The International Energy Agency (IEA), which advises the
industrialised world on energy policy, expects refinery capacity
growth to outpace oil demand by nearly 1 million bpd over the
next five years, with the biggest tranches in 2011 and 2012.
After a three-year delay, Royal Dutch Shell <RDSa.L> and
Saudi Aramco agreed last month to proceed with a $7 billion
expansion of their joint-venture Texas refinery by 2010, adding
325,000 bpd of capacity, the biggest U.S. project in decades.
Some of the tightest products will get relief sooner.
"By 2008 we'd expect to see gasoline supply ease...
Distillates are more likely to be 2009," said David Martin,
refining sector analyst at the IEA.
Next year's biggest event will be the christening of Reliance
Industries <RELI.BO> new 580,000-bpd refinery, the first of a
series of mega-plants planned across Asia and the Middle East.
Sinopec Corp 0386.HK 600028.SS and PetroChina 0857.HK
are due to deliver an estimated 500,000 bpd next year, after
almost no growth in 2007.
Signs of stagnant demand in the United States have also
helped to ease the squeeze. Total product demand over the past
four weeks is flat versus a year ago, U.S. data show.
RISK STILL LOOM
But some analysts warn that the recent weakness in product
prices may be a false dawn, a repeat of last year's autumnal
softening rather than a cyclical turning point.
"The crude oil run up is largely due to a surge in fund
buying and index buying, and they want crude not products," said
Eric Wittenauer, oil analyst at A.G. Edwards in St. Louis.
"But into the spring I would anticipate the market will look
toward the products as a driver again."
Crack spreads fell sharply at this time a year ago, and
remained weak throughout much of the winter, which was among the
warmest on record in the United States and Asia.
But that period of relief proved to be short-lived, and
margins rallied through the spring as the U.S. refining sector
entered a heavy maintenance period, coupled with a wave of
unexpected disruptions. By May, with gasoline stocks well below
normal levels, the gasoline crack was back near $40 a barrel.
Other analysts like those at consultants PVM say demand
growth will exceed new refining capacity this year and next,
extending the bottleneck for several more years.
But even if 2008 proves a pivotal year for refinery output,
there is no guarantee that tightness would not reemerge later in
the decade if soaring construction costs and a gloomier profit
outlook prompt companies to scrap expansion plans.
South Korea's S-Oil Corp 010950.KS, one-third owned by
Saudi Arabia, has frozen plans to nearly double its capacity,
while ConocoPhillips COP may not proceed with the big Middle
East joint-ventures it has been planning since last year.
"As soon as your costs go up, it causes people to stop and
think," said the IEA's Martin.
