With the Fourth of July upon us there will be no Weekend Reading next week. I’ll be spending the long weekend bumming around the Finger Lakes looking for a shady hammock. As always, feel free to reach out with any questions.

By Charles Ruff, CFA

Oil and Gasoline Prices

As a quick aside, I have a ton of fun with the greedy corporation argument. The question that goes unasked is: what changed? In 2013, were Exxon (XOM), Valero (VLO) & friends just generously passing their refining profits on to American drivers in the form of lower gas prices? What caused these once altruistic, fun-loving companies to change their ways and become greedy?

Let’s slow down for a second and actually think like analysts instead of partisan hacks. Let’s at least go deeper than social media…

Here is a 5-year chart of crack spreads… this is a very good proxy for refiner margins. Crack spreads capture the difference between inputs (crude) and primary outputs (gasoline, diesel).

Crack Spreads

Prices are up for several reasons regarding refining capacity and complexity…

  • Capacity Growth Has Been Severely Constrained
      • No one wants to live next to a refinery. They’re filthy. They smell. And, from time to time, they light on fire and explode.
      • Here is Tom Nimbley, Chairman and CEO of PBF Energy (PBF) describing the state of the market on the 1Q22 call:
        • “Strength in global product prices is being driven by a combination of increased demand and low product inventories. Global refining capacity is more than 4 million barrels lower today than in 2019. Even with relatively high utilization, current refining capacity can barely keep up with demand and is incapable of concurrently increasing global product inventories. US refining utilization is operating at near capacity as we are about to enter the traditionally peak summer demand period.”
      • Complexity
        • Oil goes into a refinery and gasoline comes out, right? Nope.
        • This is an extremely complex and global market with multiple products. The exact refining process depends on the crude that the refinery is running. Some refineries are set up to run heavy, sour crudes. Others are set up to run light, sweet crudes.
          • Oil goes into a distillation tower which sorts out the liquid based on the size of the molecules. Lighter, smaller molecules rise to the top, like liquid petroleum gas (LPG) and naphtha. Medium sized molecules like kerosene and diesel are in the middle. Larger molecules like gas oil sink down. At the bottom are the biggest molecules that go into products like asphalt. Near the top of the tower is the product that most resembles gasoline: naphtha. The naphtha must then be stripped of sulfur and nitrogen but naphtha is very low in octane so it won’t make a great fuel. To get the octane up, hydrogen must be removed so the naphtha is run through a reformer. After this, it’s ready to be blended into marketable gasoline. But much of what comes out of the distillation tower is not high-quality naphtha but actually mid-range stuff like gas oil. These medium-sized molecules need to be run through a cracker which literally cracks the molecules and breaks them down into smaller carbon chains. Then these smaller molecules need to be recombined into something usable (like gasoline). To do this, a refinery needs to run it through an alkylation unit. This all has to be calibrated correctly. If you can’t get the right feedstocks to run these separate units, you can’t run your refinery. Refineries are sophisticated chemical plants and can’t exactly be switched on and off either… Got all that? Oil in. Gasoline out.
          • The point is that the refining market is actually an interconnected web of several different markets (naphtha, gas oil, crudes, etc).
        • Here is Tom Nimbley again: “with Russia and their exports, we’re likely going to get some tightness in secondary feeds as we go forward, i.e. VGOs, fuel oils that would normally feed the cat cracker. So the fact is, we’ve started up what we can start up, and if we started up the other units, we couldn’t run them at capacity.”

    Main takeaways

    • Capacity in the refining space has not grown and now the market is paying for it.
    • Refining is a complex and global business and supply chain issues, particularly with Russia, are impacting this market.

    Presidential Power Cartoon

Copper Prices: Good or Bad Sign?

Copper is used in everything and is considered a lead economic indicator. Copper is known as the only commodity with a PhD in economics.

Prices are down about 15% YTD and more than 20% from the highs. Many are touting this as an indicator of recession.

A recession connotates a shrinking economy. Growth can slow down and still be positive.

Is anyone not expecting growth to slow down? We want growth to slow down to get inflation under control. The past 2 years have been fueled by fiscal spending and stimulus checks. Of course, growth is slowing down, the previous rate was never sustainable!

Copper Chart

But if we look out at a 5 year chart maybe these prices aren’t so bad…

5 Year Copper Chart

Here is where things get a bit complex and we start chasing our tail…

We need inflation to get under control. If the Fed can accomplish this without raising rates too high, we’ll have a ‘soft landing.’ Yay.

The big concern is that higher rates can reduce demand for housing, autos etc, but higher rates can NOT drill more oil, build more semiconductors, grow more soybeans, or mine more copper. If inflation stays stubbornly high while the Fed keeps hiking rates we could be in for a ‘hard landing.’

The real question is, how stubborn is inflation? If we see commodity prices (like copper) declining on higher interest rates, I think that’s evidence of inflation falling in the face of higher rates. Maybe that’s a good thing in the medium to long term.

Consumer Confidence as a Contrarian Indicator

I swear I made this chart all by myself and didn’t borrow it from anyone.

Buy when there is blood in the streets! Poor consumer confidence is a great signal of when to invest!

Investing at a trough, you would earn almost 25% over the next year.

Investing when consumers are confident, you earn just 4% over the next year.

A trough is defined by the eventual recovery. Are we now at the trough or is confidence still falling?

Consumer Confidence Chart


Largest Fireworks display ever.

The show was hosted by a church in the Philippines. Great use of resources in a country where a quarter of the population lives below the poverty line.

Largest single firework ever launched.


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