WTI oil tripped by economic fears while Brent soars

WTI on the other hand is weakened in part because they fear that economy will slow in the US and because of the big supply in Cushing, Oklahoma. Yet WTI came back a bit when the ISM nonmanufacturing reading came out much better than expected but really jumped late in the session on fear that shut production from tropical storm Lee may take longer to come back than traders had hoped. It appears that tropical storm Lee, while not achieving hurricane status, is still causing havoc. As of yesterday according to The U.S. Bureau of Ocean Energy Management, 60.5% of Gulf of Mexico oil production is still offline. That is less than a 1% improvement from the day before. In other words we are currently losing somewhere in the area of 846,670 barrels a day. At the same time 46% of Gulf natural gas output is still shut in. If we don't see major improvement today then oil could get another late day kick start. What's more we still have a lot of storm activity in and around the Gulf which is making it hard for business to get back to normal as the seas and the winds continue to be rough.

The National Hurricane Center now is predicting that another storm in the Gulf of Mexico has a 40% chance of becoming a cyclone. The NHC says, "A broad area of low pressure located over the extreme southwestern Gulf of Mexico has changed little in organization over the past few hours...but some gradual development of this system is possible over the next couple of days. This system has a medium chance...40 percent...of becoming a tropical cyclone as it moves little during the next 48 hours. An Air Force Reserve hurricane hunter aircraft is scheduled to investigate this system today...if necessary." At the same time another 2 systems out in the Atlantic could wreak havoc with Gulf production later this week.

Anyone want to buy a refinery? Sunoco sent a strong message to the critics of refining by saying they want out. Robert Campbell of Reuters wrote, "Sunoco Inc bit the bullet on Tuesday, announcing it would get out of the brutally competitive oil-refining business as fast as possible and in the process possibly shut a huge chunk of the U.S. East Coast's refining capacity.... The company wants out of refining by July, which doesn't leave much time to find buyers for its 335,000-barrels-per-day Philadelphia refinery or the nearby 178,000-bpd Marcus Hook facility....At a combined 513,000 bpd, the two refineries represent nearly a third of the "operable" refinery capacity on the East Coast, according to the Energy Information Administration.... Once a number of idled refineries are stripped out of that number, Sunoco looks like an even bigger piece -- maybe 40 percent -- of East Coast capacity. With regional operating rates stuck at 80 percent, closures look likely." Certainly Sunoco doesn't seem to be making an idle threat. The company is taking a charge of up to $2.2 billion to write down the value of its refining business, which would appear to represent the bulk of the carrying value of the refineries. If they are sold, Sunoco clearly doesn't expect to get much for them. Moreover, management flagged that the additional charge for a full closure of both plants would be only $500 million. Much of the painful medicine is being taken up front. A closure of at least one of the plants seems likely and the shutdown of both would not be a surprise. After all, there are refineries for sale all over the United States and Europe and precious few buyers.

The only two companies buying refineries in the United States right now do not look like potential bidders. Valero has been buying refineries but bailed out of the East Coast and is unlikely to return. Privately held PBF Energy, which bought two Valero plants, may be reluctant to add to its East Coast exposure and would likely face regulatory scrutiny if it bulked up further. Other independents may be reluctant to get into a market where dwindling demand and tough competition from surplus Gulf Coast and European fuel supplies make for tight margins. Sunoco's plants face additional challenges. Both are high-cost because they generally run light, sweet, imported crude oil, which has surged in price with the decline of North Sea production. Crude costs have been lowered somewhat by switching to more acidic grades but this has resulted in longer and more expensive maintenance turnarounds. Marcus Hook also requires tens of millions of dollars of environmental upgrades by 2013 to comply with a consent decree. A "meaningful portion" of these expenditures has not yet been made, according to Fitch Ratings. That alone could be enough to deter buyers and kill off Marcus Hook." A must read on the Reuters Wires! And another impact from the crazy Brent Market.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

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About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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