Commentary On $5 Gasoline In California -- July 29, 2015

I think everyone is aware that California has unique gasoline requirements and that refineries from outside California do not refine oil to meet California's gasoline specifications. Some Asian refineries will bring "California" gasoline to the state when it is cost-effective, which appears to be about $4.50 at today's exchange rate.

I think one could argue that, for the most part, California's gasoline supply comes from in-state refineries.

Hold that thought.

Based on newspaper reports coming out California over the past ten years or so, it appears that Californians are no more inclined to build new refineries or expand capacity any more than the rest of the country (North Dakota is somewhat of an anomaly with its new Dickinson refinery).

At the same time, there was probably no need to think about new refineries in California because the Los Angeles Times has been reporting for the past decade that coal-powered vehicles would become the norm in California, and that the few Californians driving gasoline-powered cars would be downsizing to compact and sub-compact cars. It all made any argument for more California refineries moot.

But a funny thing happened on the way to the forum.

First of all, Californians are driving more than ever.

Second, the rush to EVs seems to have peaked, another passing fad.

Third, gas-guzzling SUVs and big Ford pick-up trucks are back in vogue.

Hold all those thoughts.

Everyone, by now is quite aware that California, especially southern California, is being hit with $5 gasoline and in a news report of July 17, 2015, it did not sound like things were going to turn around very quickly.

With a crude oil glut and oil prices down to $47; with gasoline across the rest of the nation as low as $2.59, folks in California are understandably wondering why their gasoline is priced at $4.59 for regular unleaded (premium will be a lot more expensive due to the alkylate "shortage").

One of the explanations for the "shortage" of gasoline in California is the explosion at the Exxon refinery in Torrance (south Los Angeles), which is operating at 20% capacity and will continue to do for quite some time (based on that July 17, 2015, story).

I was aware of a few other reasons in addition to the Exxon explosion, but it sure sounded like that was the main reason.

I'm not so sure any more. I did not notice this until this morning, in a graph I posted yesterday. I will explain what I'm talking about but see if you see the same thing I'm seeing:

Yes, gasoline stockpiles in California are at 10-year lows this year (red line), and the averages this year have been hugging the 10-year low. However, it was actually worse last year from week 15 through week 28 (or thereabouts). 

Maybe I'm reading too much into this, but if there are no new refineries being built in California, if Californians are driving more than ever, if EVs are a passing fad (at least not growing as fast as anticipated), if Ford is having record quarters with larger SUVs and larger F-150's --

If one looks at the wild swings in the 2014 stockpiles, one gets the feeling that the situation is somewhat chaotic. 

Again, maybe I'm over-reading this, but it certainly appears last year was worse than this year -- until the Exxon refinery explosion.  If that reading is accurate, one would assume that by 2018 the situation could be much, much worse. Certainly the $5-gasoline driving season will start earlier in the spring and last longer into the autumn all things continue to trend the way they are now.

One wonders if the new refineries in Saudi Arabia (about 1 million bbl daily capacity) will be optimized to produce "California-spec" gasoline.

Note: I often misread things. I often misread graphs. I could be completely way off on this. If this information is important to you, go to the source. Do not use this site to make any investment, financial, or transportation decisions.

Wednesday, July 29, 2015 -- Part VII -- Pending Home Sales "Tumble"

Link here. Home sales tumble but not because the economy is bad or because there aren't buyers. There aren't enough houses.

Signed contracts to buy US homes tumbled 1.8 pct. in June, as limited supplies weigh on market.

The National Association of Realtors said Wednesday that its seasonally adjusted pending home sales index declined 1.8 percent to 110.3 last month. Still, strong demand from would-be buyers has pushed the index up 8.2 percent during the past 12 months.

"We could see a bit of a slowing in the recent upward trend in existing home sales in the coming months," said Derek Lindsey, an analyst at the bank BNP Paribas.

Solid hiring and relatively low mortgage rates have fueled the previous five months of gains in the pending sales index. But buying options are increasingly limited because the market contains just five months' supply of homes, compared to the historical average of six months in a healthier market.

The regional home sales number are probably much more interesting.

Based on local reporting in Grapevine, TX, houses going on the market are snapped up in days or weeks. In some areas, it's difficult to move quickly enough to put in a bid before the "sold" sign is up.  It appears they are building as fast as they can in this area.

Wednesday, July 29, 2015, Part VI -- Hess Helped By Bakken

Whiting shares surge more than 6% -- earnings release, press release.

Whiting Petroleum beats by $0.02, misses on revs; guides Q3 production; 2015 capital budget revised to $2.15 bln for 6.5% production growth : Reports Q2 (Jun) earnings of $0.04 per share, ex-items, $0.02 better than the Capital IQ Consensus Estimate of $0.02; revenues fell 29.4% year/year to $590 mln vs the $677.6 mln consensus.

• Production in the second quarter 2015 totaled 15.5 million barrels boe, 89% crude oil/natural gas liquids (NGLs).
• Second quarter 2015 production averaged 170,245 boepd. This represents a 2% increase over the first quarter 2015 despite non-core property sales of 8,300 boepd
• Co sees Q3 production guidance at 14.7- 15.1 million boe, sees 2015 guidance at 59.2-59.8 million boe

Bloomberg is reporting:

Hess Corp., which sold off fueling stations and refineries to focus on production, reported its second consecutive quarterly loss as higher oil output failed to compensate for lower prices.

The second-quarter loss was $567 million, or $1.99 a share, compared with net income of $931 million, or $2.96, a year earlier, New York-based Hess said in a statement Wednesday. Excluding one-time items, the loss was 52 cents a share, less than the 71 cent average of 21 analysts’ estimates compiled by Bloomberg.

The loss came as the company pumped more oil to make up for crude prices that fell 44 percent from a year earlier. Output rose 23 percent, led by North Dakota’s Bakken Shale where production was up a 49 percent to the equivalent of 119,000 barrels of oil a day.
Total production rose to 391,000 barrels a day, beating the highest analyst estimate of 361,600 barrels a day.

Hess also sold a half interest in operations that include a gas-processing plant, a crude rail terminal and rail cars to Global Infrastructure Partners for $3 billion in a deal that closed July 1.

Noble Corporation shares surge 6%; held throughout the day, and after hours -- earnings release, press release:

Noble Corp PLC beats by $0.11, reports revs in-line: Reports Q2 (Jun) earnings of $0.64 per share, $0.11 better than the Capital IQ Consensus Estimate of $0.53; revenues fell 1.0% year/year to $771.3 mln vs the $766.36 mln consensus.

Wednesday, July 29, 2015 -- Part V; $5 Gasoline In California Could Last Months

Updates

May 6, 2016: Torrance refinery to re-start.  
 
October 22, 2015: XOM sells Torrance, CA, refinery.  

Original Post

 

Tweeting now: US refinery throughput edged down -108,000 b/d last week but is still close to record and +211,000 b/d above prior year; imports down 2.8 million bbls compared to previous week; and, US crude oil stocks fell 4.2 million bbls. Refineries are struggling to keep up with demand.

Tweeting now: propane supplies continue to hit new record; surging. Comment: RBN Energy has covered this in depth. Some operators are paying to have their propane taken away.

Tweeting now: US gasoline consumption averaged 9.5 million b/d over the last four weeks, about +560,000 b/d above last year.

And this is why gasoline is still expensive in California:  West coast refineries continued to raise output but it remains 75,000 b/d below 10-yr average when demand is booming. Comment: one of the largest refineries in California, and perhaps the most important in southern California, the XOM refinery in Torrance remains at 20% capacity (as far as I know) due to recent explosion of its pollution control units. Yes, here it is, at The Los Angeles Times July 17, 2015:

The refinery that has historically produced about a fifth of Southern California's gasoline has been crippled since a February explosion — and may stay that way for months to come.

The trouble at Exxon Mobil's refinery in Torrance is a major factor pushing up regional gas prices, which have risen dramatically this month. Restoring the site to full capacity is among the best hopes for bringing prices back down.

The Torrance refinery currently operates at less than 20% of its capacity.

Exxon Mobil asked the management district for approval to use an old pollution control unit it replaced in 2008 to temporarily restore full operations of the Torrance refinery, but regulators said the equipment does not capture emissions well enough. Emissions from the older unit would violate state regulations and rules.

For those who still don't understand why gasoline in southern California can cost nearly $5 / gallon:

Having said that, did you notice something even more remarkable in the graph above? In fact, the gasoline stockpiles were actually running higher than last year from Week 13 to Week 26. The blast at the XOM refinery occurred on/about February 18, 2015, the 8th week of this year. In other words, the gasoline stockpiles were actually lower last year at this time, and I don't recall any explosion shutting down a major refinery in California at this time last year. In fact, California reached its historic low of gasoline stockpiles last year in Weeks 15, 23, and 26 or thereabouts (hard to tell from the graph).

I truly thought the XOM refinery explosion was the main culprit, but it appears that the explosion simply exacerbated something else already going on in California. Call me naive, but it certainly looks like the refineries in California have not been able to keep up with increased demand for gasoline over the past ten years in California. If this is accurate, $5 gasoline is going to be a recurring nightmare for Californians every summer (and that $5-gasoline driving season will arrive earlier each spring and last longer into each autumn). My hunch is that the Californians will catch on to what is happening sometime in 2018.  

Wednesday, July 29, 2015 -- Part IV; The Power Of ATT

SM surges 9%.  2Q15 highlights (company's press release):

• produced 16.5 million barrels of equivalent, up 23% from the prior year period and exceeded plan
• realized $337 million adjusted EBITDAX and $0.49 per diluted common share adjusted net income, driven by well performance and lower costs
• encouraged by preliminary results from a 14-well Eagle Ford down-spacing test
• demonstrated performance from 9 Bakken test wells in Divide County that are exceeding type curve
• maintained 1.7 times debt to adjusted TTM EBITDAX 

Remember: the "heat map" of the Bakken includes the area where SM Energy is drilling in the Bakken.

I can't find my photo now, but SM Energy is building (has probably completed) its new operations center north of Williston. It's another huge building in the Williston area, and strikingly modern in appearance.

******************************

Of all the tech companies right now, the one that is most interesting to me right now is ATT. It appears the deal to buy DirecTV will go through, and now ATT announces that it will activate the FM chip in all android phones next year. Link here:

Smartphones have a lot of radios inside to provide all of the services we expect. Most of them have a radio that is turned off by the handset maker, likely for business and cost reasons. The FM radio for getting local music, news, and emergency information is not activated.

That will change next year for AT&T customers as the carrier will make active FM radio chips a specification for all Android smartphones it sells.

That will put the pressure on Android handset makers to turn the FM radios on if they want to sell on AT&T.

This is not an investment site. Do not make any investment decisions based on anything you read here or think you may have read here.

ATT shares trade near their 52-week high, have been trading in a range for quite some time, and the shares continue to pay 5.5%.