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Clarification on Oil Prices

This piece was originally published on October 13th, 2023.

I got a great question today from DKI reader, Eric, who correctly pointed out that it appeared I was claiming that Russian refining difficulties could lead to lower crude prices. The relevant paragraph is from the Energy section of today’s CPI post. I’ve re-read it, and agree with Eric that I need to clarify.

 

Oil is a strange market where investors watch the price of unrefined (crude) oil, but consumers focus on refined products like gasoline and fuel oil. To track the price of crude, we typically look at Brent for international oil and West Texas Intermediate (WTI) for domestic oil. The price of refined product like the gasoline you put on your car typically reflects the price of unprocessed oil (crude), plus the cost of refining (crack spreads), plus the price of transportation (typically pipelines and ships), plus taxes (depending on your location). Refined product is often referred to as distillates.

 

Russia is short on the materials needed to refine its crude oil. That means Russia will need to export more crude. It also means they’ll export less refined product. This additional crude oil on the market will act to lower the price of Brent. However, the inability to refine means additional transportation costs, and more refining capacity utilization in other locations (higher crack spreads). What we’ll see is lower Brent crude prices due to more supply which will be more than offset by higher crack spreads and higher transportation costs leading to an increase in the price of gasoline, fuel oil, and other refined products. So, downward pressure on crude prices with upwards pressure on distillates.

 

A few other influences to keep in mind:

  • Loss of pipelines like the Nordstream pipeline and the recently sabotaged Finish one leads to higher transportation costs and higher refined product prices.
  • War in the Middle East always leads to higher crude and higher refined product prices.
  • US sanctions or lifting of sanctions on oil producers like Venezuela and Iran can decrease or increase supply affecting the price of both crude and refined.
  • The US selling off its strategic petroleum reserve (SPR) to 40-year lows reduced the price of both crude and refined. Any attempts to refill it have led to higher prices.
  • Long term, the worldwide demand for energy combined with green policies designed to limit supply will lead to much higher prices. More than anything, this is why DKI has a huge energy portfolio.

 

Thanks to Eric for the excellent question.

 

IR@DeepKnowledgeInvesting.com if you have any questions.

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

 

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