RBN Energy: how Saudi pricing formulas work.
Ever since crude oil prices began their precipitous fall in June 2014 market watchers have picked through the tealeaves of every OPEC statement - particularly those of Saudi Arabia - for signs of a change in policy. One widely watched signal comes every month when the Saudi’s publish differentials that determine the price customers pay for their crudes. Today we explain how Saudi pricing formulas work.
We have previously discussed how international crude pricing works in the context of the Brent physical market based on cargoes loaded each month at the Sullom Voe terminal in the Shetland Islands and the related ICE Brent futures contract traded on the ICE platform.
The Brent physical market, like the physical market for most U.S. domestic crudes is based on bilateral trades between counterparties owning physical crude. Price reporting agencies like Platts and Argus publish daily price assessments for these crudes using information traders share about deals done.
In the U.S. most crude oil transactions are priced basis the benchmark West Texas Intermediate (WTI) crude delivered to Cushing, OK. The WTI price at Cushing is in turn underpinned by the heavily traded CME NYMEX light sweet crude futures contract. In this way U.S. and international benchmark crude prices are set based on a more or less transparent spot market involving numerous counterparties.
In contrast to these open market transactions, the price of crude sold by most OPEC producer nations is now based on formulas determined by a term contract between the crude buyer and the selling national oil company. Over time the Saudis and other OPEC members have experimented with various different pricing mechanisms including administered prices and for a brief period in the mid-80’s “netback” pricing where crude prices were determined by refining margins. Since then the system of formula prices emerged to become dominant.
We have discussed one such price mechanism before in a couple of blogs - the Mexican national oil company PEMEX formulas for their heavy Maya crude that is just beginning a turf battle on the Gulf Coast against Canadian heavy crude competition. This blog takes a closer look at Saudi crude price formulas.
Hard To Put Spin On This
For third month in the last four months, orders for durable goods fell. US News & World Report is reporting:
Orders to U.S. factories for long-lasting manufactured goods fell in February for the third time in the past four months, while a key investment category fell for a sixth month.
Orders for durable goods dropped 1.4 percent in February following a 2 percent increase in January and declines of 3.7 percent in December and 2.2 percent in November, the Commerce Department reported Wednesday. A key category that serves as a proxy for business investment spending retreated 1.4 percent in February, the sixth consecutive monthly decline.
Scary.The weakness in February was widespread, with weaker demand for commercial aircraft, autos and machinery. Economists expect domestic demand to strengthen in the months ahead and hope that will be enough to offset weakness caused by a stronger dollar, which dampens export sales of U.S. companies.
But it certainly questions the wisdom of the Fed raising rates. Maybe we need more stimulus.
Tesla -- WSJ
Elon Musk has proved that a market exists for electric cars, despite their many inconveniences, especially if they come wrapped in taxpayer subsidies. He hasn’t proved he can make a profit.
His idea of an industry at scale, he would probably be loath to admit, almost certainly depends on government intervention to make gasoline-powered cars increasingly prohibited. His gigafactory, to which he will commit $2 billion to double the world-wide capacity of existing lithium-ion batteries, is a mute acknowledgment that he sees no battery breakthroughs in the offing that would transform the problems of range anxiety and recharge times.
His latest announcement at least has him no longer attacking journalists who mention the problem of range. He updated the car’s software so it will constantly tell the driver if he can hope to reach his destination or the nearest charging station. When a driver gets there, though, he’ll still spend hours, not minutes, filling up.
So what's it all about?
As the perpetually blunt Sergio Marchionne of Fiat Chrysler has pointed out, Obama fuel-economy rules virtually require car companies to produce electric cars at a loss.
Part of Tesla’s market value, then, is attributable to the likelihood that it will be acquired by another car maker needing electric vehicles to offset its gasoline-powered vehicles.
But here’s an irony: In a world where other car makers are forced to build and sell electric cars too, Tesla’s golden brand gives it a leg up, but Tesla does not have the option of forever losing money on electric cars. To fully realize its brand value Tesla might have to sell itself to an auto maker that does.
I still maintain that Tesla is a battery company depending on government mandates.
President Obama Signs Executive Order Barring Ted Cruz From Signing Up For ObamaCare
The New Yorker is reporting:
Just hours after Senator Ted Cruz (R-Texas) told CNN that he had no choice but to sign up for Obamacare, President Barack Obama signed an executive order making Cruz ineligible for coverage under the Affordable Care Act.
“Clearly, the hardship of receiving Obamacare was causing Ted a great deal of pain,” the President said. “This should take care of that.”Satire. Go to the link.
Obama acknowledged that the executive order, which makes Cruz the only American expressly forbidden from signing up for Obamacare, was an extraordinary measure, but added, “I felt it was a necessary humanitarian gesture to protect Ted from the law he hates.”