Bubbling Crude

I have simple rule that I follow when looking at the oil market. Whatever the traders say, take the opposite view. It’s cheap, fun and easy. Plus, you’ll always find the most reasoned and rational take on the market.

For example, let’s say some sneezes at a refinery. This means that the traders think the refinery will shut down, so they’ll panic and buy. Oil will skyrocket and cause more panic buying.

By taking the opposite view, we find that a closed refinery will mean that they’ll buy less oil not more. See? It’s not that hard. Today, the WSJ says:

In recent weeks a number of refinery incidents have kept pressure on oil prices. The outages have involved units at more than a dozen refineries that together have the capacity to run 3.2 million barrels a day of oil, or roughly 19% of total U.S. capacity. But the actual amount of refinery capacity taken offline, while hard to gauge, is likely much less.

Likely much less? How about “a teeny tiny drop in the ocean?

The outages may be just a run of bad luck. But with refineries running near industry highs, analysts say the glitches also could be the result of a U.S. refining system being pushed too hard. “When you push that hard there appear to be a disproportionate number of surprises,” says Mr. Goldstein. Valero says outages are more likely to occur during the summer months when temperatures are high and utilization rates are at their highest.

Of course, the refinery system is being pushed too hard. Obviously, we need more refineries. But I don’t get how that adds $20 to the price of oil.

BP said its Texas City outage would have a minimal impact. But analysts and refiners said in today’s environment any development that rattles traders can result in short-term jumps. “There is no reason for crude oil to be at $65 a barrel other than hype in the market,” said Mary Rose Brown, a Valero spokeswoman.

Thank you, Mary. I won’t predict when oil will fall, but this rally is running on emotions and nothing else.

Posted by on August 12th, 2005 at 11:21 am


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