The Refinery Side of the Equation

From the FT:

Assessing the impact of the storm that closed refineries in the US's most important oil producing region, Europe's second largest oil group said it expected production in the region to reach only 60 per cent of the pre-hurricane levels by the end of the year.

It added that refineries at some sites including Mars, one of the gulf's largest deep water platforms capable of producing 220,000 barrels a day, were unlikely to resume activities this year.

The region, which produced an average 450,000 barrels of oil equivalent per day or about 15 per cent of group production in the first half of the year, is now only producing 160,00 boe/d following the damage caused by the storms.

This is the flipside of the story from last night.

Update: I may have confused some details and I kind of wonder if the author of the story did as well. Despite all the references to refineries and refining capacity near the top, the story closes with this:

In addition, Shell said a third of its refining capacity in the US had been knocked out by Hurricane Katrina. Before the storm Shell refined a million barrels of oil a day at its seven refineries in the US. Two of these sites - Motiva Convent and Motiva Norco had been affected but were expected to return to pre-hurricane levels by the middle of next week.

At this point I am guessing this last section is the only portion dealing with refining and that the deep water platform, Mars, is mistakenly referred to as a refinery.

Watching Oil vs. Gasoline Spread

From the FT:

The US and Europe are releasing more emergency crude oil than refineries in the Gulf of Mexico can handle, reinforcing suspicions that governments are using the crisis triggered by Hurricane Katrina to cap record oil prices.
Data from US oil inventories released on Thursday showed that crude oil stocks had fallen by 6.45m barrels, well below the 13.6m barrels of oil production that by Wednesday had been lost as a result of the hurricane.

This has been pretty well telegraphed with most people being very aware that the hurricane had a bigger impact on refining capacity than oil production. Prior to the hurricane refineries were already being talked about as a bottleneck.

It could still make an interesting situation though as a trader could have been very right and foreseen an inflation spike but still end up being positioned exactly wrong as oil (which has been leading the commodity charge) goes the other way. I don't know the commodity market as well as the credit market but the situation is a bit similar to the wishbone in the automotive sector when the credit downgrade came on the heels of Kerkorian's GM tender.

I haven't been blogging much lately as my views haven't changed very much since early Summer. The continued strength in the equity markets has been at odds with the problems I see so I have done very little. Prior to Katrina I thought the housing market was finally losing steam and leaving little cause for inflation. That is no longer the case as the refining and general transport issues caused by the storm are unknowable at this point.

Got to be one of the more interesting Fed meetings approaching. I lean towards a hike at this meeting.

Ready for the Jobs Report

Bill Cara summarized the odd strength in bonds in the face of some scary oil news. Also on oil I would point out the IEA recommendation to help panic consumers. Sounds like the rolling brown outs in California a few years back, but for cars. News like this has the potential to eventually undermine the anchoring of inflation expectations if and when it is affecting day-to-day living.

I first heard calls for $85 oil back in December, then again at the beginning of March. Then we had an OPEC meeting that basically indicated spot prices are now driven by estimated demand in Q4 and thereafter. With spot prices unhinged from the present details that market is ripe for speculators to push the price wherever they want. In judging the moves it is probably best to keep an eye on the far forward contracts rather than the front month.

Adding to the inflationary comeback yesterday, Merrill Lynch increased its price forecasts for copper, aluminum, nickel and zinc for the next three years. The industrial metals did not respond too dramatically but stocks like Phelps Dodge (PD) are now back wrestling with their breakdown point from Tuesday.

The dollar was steady to down and bonds rose on all this information. I don't think the jobs report will add to inflation pressures but instead will continue to be lackluster. This provides fuel for people like Roach who question whether the Fed will really fight inflation in the face of weak growth. That is a recipe for steepening.

Stocks look like they could stay strong no matter what the number but it kind of feels like the dollar wants to come back down a bit. We shall see.

Oil Enema?

The price action in the OSX is making me think the top in oil may have been prematurely pronounced. If that proves to be the case I am not sure it will be very well received by an extremely overbought tape. Top in oil corresponded pretty closely with the October bottom in stocks.

We had some more proof from AMG this morning that retail investors like this equity market. Good if you are a broker but probably less good if you own stocks. Retail investors generally have horrific timing. As I said yesterday, it certainly explains the momentum in the tape.