Post by FWS on Oct 15, 2012 13:05:43 GMT -6
U.S. Oil Boom Falls Short of Pump
Gas Prices Stay High Even as Production Surges, as Midwest Can't Dent Global Market; Some Refiners Profit
By LIAM PLEVEN and GREGORY ZUCKERMAN
The Wall Street Journal
October 15, 2012
Surging U.S. oil production is driving down domestic benchmark crude prices and delivering a windfall to some refiners and their investors. But the oil boom is providing little relief for consumers at the pump.
Some Midwest refineries including HollyFrontier Corp. have benefited from surging U.S. oil production. Above, a HollyFrontier refinery in Tulsa, Okla.
Surging U.S. oil production isn't offering much relief for consumers. Liam Pleven explains why on Markets Hub. Photo: Getty Images.
U.S. crude production is expected to rise 12% this year and 8% in 2013, when it will hit the highest level since 1993, according to government figures. The price of West Texas crude, the U.S. benchmark, has fallen 7% this year, held down by rising supplies from new drilling methods.
Yet gasoline prices currently average nearly $4 per gallon nationwide. Rising U.S. crude production may seem like an attractive antidote, but it is proving ineffective on its own at a time when the world's appetite for energy remains voracious and Middle East tension is a reminder that supplies could be disrupted.
"Even the significant increase in U.S. production is a small part of the world oil market," said Severin Borenstein, co-director of the Energy Institute at the Haas School of Business.
Refiners that process the cheaper crude are selling gasoline and diesel into a global market driven more by higher international prices for crude, which are up around 7% in 2012.
Some are benefiting. Refiners in the Midwest—near where much of the new oil is produced or stored—can often pay less for the raw crude than do rivals in U.S. coastal areas and abroad, but can charge market prices for the sought-after gasoline and diesel they churn out.
HollyFrontier Corp., which owns refineries in Oklahoma, Kansas and elsewhere, saw net income jump 149% to $502 million year over year in the second quarter. Tesoro Corp., which operates a refinery in North Dakota, where crude production has roughly quadrupled in four years, reported a 77% leap to $393 million in the same period.
Shares of HollyFrontier are up 60% this year, while Tesoro's shares have gained 64%.
Billionaire financier Carl Icahn has also scored big. Mr. Icahn bought up over 58 million shares in CVR Energy Inc. in the second quarter, boosting his stake to 82% of the Sugar Land, Texas, firm's shares. CVR runs a 115,000-barrel-per-day refinery in Oklahoma.
Since the end of August, CVR shares have climbed from less than $30 to $38.08, close to an all-time high. That has given Mr. Icahn's firm, Icahn Associates, a paper gain of over $600 million in the past six weeks.
"It's been an excellent investment so far," said Mr. Icahn.
"Rising North American crude production should lead to increased stability in the refining industry, which we believe will result in a more secure supply and steady price for the U.S. consumer," Julia Heidenreich, a HollyFrontier spokeswoman, said in a statement. She added, "Given our access to cheaper crude oil in the geographies where we operate, HollyFrontier should enjoy structurally higher margins going forward."
Tesoro declined to comment.
Benchmark U.S. crude is based on prices at the Cushing, Okla., storage hub, and is known as West Texas Intermediate, or WTI. That price is now nearly $23 cheaper than Brent crude, the European benchmark. The gap has more than doubled from $8.55 at year-end, surprising many analysts and investors who expected it to be narrower. Before 2011, the gap was typically within a dollar or two.
WTI settled Friday at $91.86 per barrel. Brent has headed in the other direction, rising 7% this year amid concerns about tight supplies abroad and Middle East tension. Brent settled at $114.62 on Friday.
Part of the trouble is that the oil being pumped out in North Dakota and other states is largely landlocked, because there aren't enough pipelines or other infrastructure to send the crude elsewhere. That is creating a glut that is keeping prices low.
Gasoline prices in the Midwest would be most likely to benefit from declines in the price of WTI. But gas prices there haven't fallen relative to the rest of the country, according to a June study co-written by Mr. Borenstein of the Energy Institute.
The reason is that Midwest refineries are operating at near full capacity and selling everything they can produce, but that still isn't enough to satisfy demand from drivers. As a result, the region imports at least some gasoline, paying higher international prices, according to economists. That keeps the price of all gasoline high.
"They're going to have to pay what basically everybody else is paying," said Michael Plante, a research economist at the Federal Reserve Bank of Dallas.
To be sure, unclogging the Midwest bottleneck wouldn't necessarily have a big impact on retail gasoline prices nationwide, either. Even if far more Midwest oil could get to the wider market, the impact would be "in the pennies. A penny might be it," said Mr. Borenstein.
As well, some investors and analysts expect the gap between West Texas and Brent prices to narrow as supply disruptions ease and the U.S. bottleneck is gradually unclogged. Should Brent fall significantly, cheaper oil everywhere could result in lower pump prices.
Nonetheless, analysts and investors don't expect the difference to disappear soon.
"Some element of the spread will last for quite some time," said Brison Bickerton, managing director at Freepoint Commodities, a trading firm.
Gas Prices Stay High Even as Production Surges, as Midwest Can't Dent Global Market; Some Refiners Profit
By LIAM PLEVEN and GREGORY ZUCKERMAN
The Wall Street Journal
October 15, 2012
Surging U.S. oil production is driving down domestic benchmark crude prices and delivering a windfall to some refiners and their investors. But the oil boom is providing little relief for consumers at the pump.
Some Midwest refineries including HollyFrontier Corp. have benefited from surging U.S. oil production. Above, a HollyFrontier refinery in Tulsa, Okla.
Surging U.S. oil production isn't offering much relief for consumers. Liam Pleven explains why on Markets Hub. Photo: Getty Images.
U.S. crude production is expected to rise 12% this year and 8% in 2013, when it will hit the highest level since 1993, according to government figures. The price of West Texas crude, the U.S. benchmark, has fallen 7% this year, held down by rising supplies from new drilling methods.
Yet gasoline prices currently average nearly $4 per gallon nationwide. Rising U.S. crude production may seem like an attractive antidote, but it is proving ineffective on its own at a time when the world's appetite for energy remains voracious and Middle East tension is a reminder that supplies could be disrupted.
"Even the significant increase in U.S. production is a small part of the world oil market," said Severin Borenstein, co-director of the Energy Institute at the Haas School of Business.
Refiners that process the cheaper crude are selling gasoline and diesel into a global market driven more by higher international prices for crude, which are up around 7% in 2012.
Some are benefiting. Refiners in the Midwest—near where much of the new oil is produced or stored—can often pay less for the raw crude than do rivals in U.S. coastal areas and abroad, but can charge market prices for the sought-after gasoline and diesel they churn out.
HollyFrontier Corp., which owns refineries in Oklahoma, Kansas and elsewhere, saw net income jump 149% to $502 million year over year in the second quarter. Tesoro Corp., which operates a refinery in North Dakota, where crude production has roughly quadrupled in four years, reported a 77% leap to $393 million in the same period.
Shares of HollyFrontier are up 60% this year, while Tesoro's shares have gained 64%.
Billionaire financier Carl Icahn has also scored big. Mr. Icahn bought up over 58 million shares in CVR Energy Inc. in the second quarter, boosting his stake to 82% of the Sugar Land, Texas, firm's shares. CVR runs a 115,000-barrel-per-day refinery in Oklahoma.
Since the end of August, CVR shares have climbed from less than $30 to $38.08, close to an all-time high. That has given Mr. Icahn's firm, Icahn Associates, a paper gain of over $600 million in the past six weeks.
"It's been an excellent investment so far," said Mr. Icahn.
"Rising North American crude production should lead to increased stability in the refining industry, which we believe will result in a more secure supply and steady price for the U.S. consumer," Julia Heidenreich, a HollyFrontier spokeswoman, said in a statement. She added, "Given our access to cheaper crude oil in the geographies where we operate, HollyFrontier should enjoy structurally higher margins going forward."
Tesoro declined to comment.
Benchmark U.S. crude is based on prices at the Cushing, Okla., storage hub, and is known as West Texas Intermediate, or WTI. That price is now nearly $23 cheaper than Brent crude, the European benchmark. The gap has more than doubled from $8.55 at year-end, surprising many analysts and investors who expected it to be narrower. Before 2011, the gap was typically within a dollar or two.
WTI settled Friday at $91.86 per barrel. Brent has headed in the other direction, rising 7% this year amid concerns about tight supplies abroad and Middle East tension. Brent settled at $114.62 on Friday.
Part of the trouble is that the oil being pumped out in North Dakota and other states is largely landlocked, because there aren't enough pipelines or other infrastructure to send the crude elsewhere. That is creating a glut that is keeping prices low.
Gasoline prices in the Midwest would be most likely to benefit from declines in the price of WTI. But gas prices there haven't fallen relative to the rest of the country, according to a June study co-written by Mr. Borenstein of the Energy Institute.
The reason is that Midwest refineries are operating at near full capacity and selling everything they can produce, but that still isn't enough to satisfy demand from drivers. As a result, the region imports at least some gasoline, paying higher international prices, according to economists. That keeps the price of all gasoline high.
"They're going to have to pay what basically everybody else is paying," said Michael Plante, a research economist at the Federal Reserve Bank of Dallas.
To be sure, unclogging the Midwest bottleneck wouldn't necessarily have a big impact on retail gasoline prices nationwide, either. Even if far more Midwest oil could get to the wider market, the impact would be "in the pennies. A penny might be it," said Mr. Borenstein.
As well, some investors and analysts expect the gap between West Texas and Brent prices to narrow as supply disruptions ease and the U.S. bottleneck is gradually unclogged. Should Brent fall significantly, cheaper oil everywhere could result in lower pump prices.
Nonetheless, analysts and investors don't expect the difference to disappear soon.
"Some element of the spread will last for quite some time," said Brison Bickerton, managing director at Freepoint Commodities, a trading firm.