The Tippy Canoes of the Refining World
Canoes are neither logical nor friendly modes of water travel. There is no motor, no sail, and the back looks like the front, or is it the front looks like the back? Well at least there is symmetry when you look at this vessel sideways. Symmetry is another word for equilibrium or balance and balance is something you lose if, for whatever reason, you should try and stand in one of these things.
The refining world is like a canoe, the consumer is trying to stand up in it while Mother Nature is kicking up some waves.
There are two seasons in the refining calendar: the heating season (heating oil and diesel), which is from October to the end of March; and the driving season (gasoline), which is from the end of May to Labor Day. Once the peak of demand has passed, refiners undergo planned maintenance to ready themselves for the upcoming “season.” This normally results in an overall balance in supply and demand until Mother Nature gets in a bad mood like the one she’s in now with Old Man Winter.
The highest demand period for heating oil and propane is normally from mid-January to the end of February, but not this year. Temperatures have been unusually low since late November. This has drawn down inventories of both of these fuels, and driven prices to, ‘the-sky-is-falling’ levels.
Inventories of heating oil on the U.S. east coast are 50% below the five year average with consumption running at four million bpd versus the norm of 2.1 million bpd. Low temperatures aren’t the only culprit as the Gulf coast refiners prefer to export diesel (which is a rebrand of heating oil) to the higher margin markets of Mexico and Brazil – all of this under the ever watchful eye of the Obama Administration.
Propane, another heating fuel derived from the crude oil refining process, is also in short supply due mainly to that Nature Lady. Inventories are currently 44% lower than last year with the biggest drop being in the U.S. mid-west and Gulf states.
In the U.S., price increases have been reflecting the lower inventories and temperatures. Prices in Canada have also spiked, but to a greater extent they are due to the dive bombing Loonie soon to be renamed the Quail as in the dying variety.
Propane prices tend to follow crude prices but crude is transacted in U.S dollars. With the Loonie at $0.89 that means the $97/bbl WTI posted crude costs $109 in Canadian funds.
Things may get worse as this is the time when refiners shut down for the seasonal change over to the production of higher yields of gasoline. This will lower inventories for diesel, heating oil and propane even further with the reverse effect on prices. If they don’t conduct the changeover then gasoline inventories will be low in the late winter/early spring with the resultant spike in pump prices, which will not be popular with the politicians in this mid-term election year.
So it’s a “pay me now or pay me later” situation for manufacturing and transporters of goods by rail or road who are paying now and the gasoline consumer who will be paying later.
As for the State of the Union, with still no decision on the XL Pipeline, I would say to President Obama that his union is going to be in a sorry state as will he be.
~ The Grouch
Roger McKnight speaks with BNN’s Andrew Bell on Commodities
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