imo, either oil has to come down, or gas has to go up (i.e. rbob “only” up 35% ttm; wti up 90%)…bbg paints a picture that some insiders and big funds are screaming for one of these to happen.

“And unlike the chart on the left, a substantial rise in the differentials on the chart on the right means that we suffered greater losses on each barrel of these products that we produced. The issue here really is that asphalt prices, six oil prices, and so on just haven’t been able to increase at the same rate that crude oil has increased”

It wasn’t clear to me whether the FT article was speaking to some global average or taking a more regional perspective, nevertheless

If you are using the term ‘fungible’ to imply equivalance as though there is some generic oil, please take a look at the differences in API gravity and sulfur contents among the world’s crude oils.
(Higher API = lighter oil; Sulfur over 0.50 usually = sour)

See: Crude Oils and their Key Characteristics
http://www.piwpubs.com/DocumentDetail.asp?document_id=200017

Which also relates to refiners’ different configurations, which can’t be changed overnight but have been changing towards ability to use heaver and/or more sour grades.

Aside from that, crack spreads can be hedged.

US Gasoline (UGA) is an index that tracts movements in rbob contracts, but it has only $31m in AUM.

If anyone knows any distillate vehicle with significant AUM, please post it.

Or does it mean that while they sell their product in a local market, they buy their feed stock in an international market?

Just what does the fact that local (U.S.) crack margins are low have to do with the price of oil, a fungible comodity that is traded globally? That’s a very provincial mentality.

I live in Mexico and the price of diesel is 5.5 pesos per liter, about $2.11 dollars per gallon. What kind of a crack margin does that imply?

Death to classical liberal economics!

Long live subsidies!

—But the conclusion that light, sweet premiums speak against speculation seems to me unwarranted. Remember, we are entering the driving season when distillate demand peaks, and so demand for light, sweet peaks. Refiners risk having empty tanks when customers’ tank trucks hook up, so even if they are groaning about it refiners must bid a little over market to ensure that they aren’t the one with the dry hole. What strikes me about the folks cited in the post, as often elsewhere, is that they don’t seem to put the whole delivery chain in the same picture, only pieces of it, so they don’t get the supply-cost-volume-demand components to sum.

Futures market specualation ?

That is, the total refined products have been selling for less than the price of raw oil…that’s why refiners are at sub-90% capacity (and bottomed in the low 80%’s…aka Katrina/Rita levels).

Put another way, there is more demand for oil than there is for the actual distillates…or, one more way – the distillate paper market isnt responding like the crude paper market is (aka one of them might be broken).

In either case, this is the point where traders would short oil and buy distillates, arbing away the spread…but, as we saw last week, the shorts keep getting leveled, so that trade doesn’t work…

“The fact that refiners are willing to pay a higher price for physical supplies than the futures benchmark lends weight to the argument that speculators are not the cause of record oil prices.”

If anything, that makes me think speculation is even more of a problem given that the primary consumers in futures markets can’t rely on these markets to lock in the contracted future/spot prices.

Why can’t refineries lock in delivery at futures prices like they always have? That sounds dangerously similar to what is happening w/ grain markets where farmers are dropping out due to lack of reliability in spot/future convergence.

EPA restrictions shouldn’t be a problem in China, India, or the Middle East.

If the underlying proposition of this post is that there is a growing disconnect between light and heavy crude, rather than an overall supply problem per se (or perhaps in addition to an overall supply problem, as 140-11 is still more than 70-2), then this post raises the obvious question: what is changing so rapidly in global oil consumption that the composition of oil demand is changing so quickly?

As a non-oil expert, I can speculate (wildly and without basis on a couple of possible scenarios.

1) Are light and heavy oil used for different things (e.g. gas / diesel / transport fuel vs plastics / industrial uses? This would imply that transportation requirements of goods is rising faster than the production of oil-based goods (e.g. we’re spending more diesel to transport a plastic toy from China than before when it was made here).

2) Light and heavy oil is used for the same things, but refining heavy oil costs more money, and causes more pollution. Thus, the differential in price between light and heavy grades reflects rapid global increases in environmental restrictions leading to cost escalations that in turn require higher heavy-grade discounts in order to be economically competitive.

3) Light oil is peaking much earlier than heavy oil. Thus, even if global consumption patterns and refining cost differentials remain the same, there is a shortage of light crude while heavy crude supplies remain stable (for now). Interestingly, Saudi Arabia’s largest field, Ghawar, produces much of the Saudis’ light oil, and this is the one the peak oil folks keep saying is due for a massive decline. Perhaps we should be talking about Peak Light Oil?

Anyway, consider those a layman’s attempts to connect the dots…