Understanding Oil
Helpful Information about Refining and the Oil Industry
Tip #1 - Refinery Issues in Making Crude Oil into Products
No refinery can choose to make just one product. It must refine
the entire barrel of oil, which results in the simultaneous production of several products.
Basic products include gasoline, kerosene, distillate fuel (diesel or heating oil), and
residual fuel. Flexibility exists to make more or less gasoline and distillate fuel by
changing operations internally.
A key to analyzing what the industry will do next is to watch the levels of inventories
with the understanding of three things: supply, demand and maximum storage capacity. A
rule of thumb to remember is that the refineries cannot continue to operate at high speed
(maximize utilization) unless they can sell and store everything they make.
As inventories of any product reach maximum, one of two things will happen: the price will
come down so the product will sell, or the refiners will slow down the refineries. Since there
are many refineries acting independently in competition for market shares, this dynamic
situation creates opportunities for companies to increase or lose market shares.
Tip #2 Gasoline Not Working Right?
In the meantime, consumers in the West should consider
buying the gasoline that runs the best in their vehicle, at the station that has the lowest price for
that type of fuel. Be mindful of mileage and engine knocking. And consider staying with a brand
that works the best instead of switching based on price alone. No two reformulated fuels are alike
-- and there is likely to be significant differences in performance. Environmental agencies
were so quick to bring reformulated fuels to market that they omitted dealing with the issue of
how the fuels will perform when mixed together in an automobile tank. Because reformulated
fuels must contain oxygenates (i.e. methanol, MTBE, ethanol, etc), they do not mix like regular
refined gasoline. Mixing brands of reformulated
fuel may result in unexpected complications -- or might result in fuel that is better than either brand
alone. No one really knows, and the testing seems to have been left to the consumer.
Tip #3 - About Crude Oil and Gasoline Forecasts
Forecast Note: Beginning April 27, 1998 NOESIS will post graphs with crude oil and gasoline
price forecasts for the next 6 months (or more). Readers should remember that forecasts are projected based
on current data. In other words, if all else remains the same, the price "will do this."
However, from past experience we know that decision makers use forecasts to adjust their operations.
For instance, in 1983 a forecast was developed which showed the price of oil would go to $40+ per barrel
because U.S. refineries were extremely limited in their ability to refine crude oils of varying
API gravity and sulfur content. By the late 1980's most major refineries had undergone modifications
to allow them to process a wider range of crudes. The price of oil began to come down partially
because refiners could choose to refine heavier, higher sulfur crudes. And while prices did top
out at $40/bbl, they did not stay there.
NOESIS has readers from all of the major oil companies and most of the major crude oil producing
countries around the world. We hope that each reader will consider our forecast as they develop
their strategies. Obviously, if any or all of those companies and countries change their operating
strategies, the NOESIS forecast will no longer be accurate. Therefore, from time to time NOESIS
will update the forecast based on new information. Finally, investors -- please go back to the
Main page of this site and read the warning carefully.
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