TORONTO, Oct. 31, 2013 /CNW/ - PF Group Inc. is pleased to announce the
results of its latest study. Data released by the US Energy
Information Administration (EIA) over the past several years have
pointed to a compelling shift in the strategic context of US oil
markets that may emerge in coming decades. The interwoven threads of
pipelines, railways, carbon emissions, and political maneuvering are
joined together in the loom of US refiners.
Incremental increases in US refining capacity over the past twenty years
have roughly kept utilization rates in the mid-80% range, with fewer
than one million barrels per day of idle capacity, while at the same
time that overall refiner output has grown by approximately 25%. This
increase in output has roughly kept pace with population growth on a
Since the turn of the century the quality of crude oil used as feedstock
for refineries, as measured by sulfur content and API gravity, has been
relatively stable. Prior to this period, however, there was a material
change in crude oil sourness and density, with average sulfur content
rising by ~50% and API gravity falling by ~10%.
Although US crude oil production has increased since the mid-2000s, the
EIA is forecasting crude oil production shortfalls of ten (currently)
to twelve (after 2019) million barrels per day compared to US refining
capacity; the US will demand substantial imported crude oil into the
foreseeable future. Consequently, Canadian pipeline and railway access
to the US will remain a major policy issue. If Canadian oil production
doubles as projected, escalating conflict over transportation of
Canadian crude oil may dominate Canada-US relations with a spillover
effect into Canadian trade arrangements outside of North America.
However, of more interest are the recent developments in US oil product
end market sales. In particular, growth of US refinery output has
outpaced US domestic demand for refined petroleum products, leading to
a tripling of US petroleum product exports since the financial crisis.
This suggests that US refineries supplying non-US demand for refined
oil products are driving a portion of US oil import demand; compared to
domestic demand, US refiners have excess capacity.
Refining overcapacity may attract the attention of environmental
constituents and become the new carbon battleground, displacing current
attention focused on crude oil transportation. As long as US refiners
have capacity and an end market they will demand crude oil. Combatting
the transportation of oil to refiners, whether by pipeline, rail, or
ship, is similar to squeezing a balloon full of water - market forces,
like water, cannot be compressed and undue external pressure will cause
them to expand outside of the pressure zones.
Instead of fighting the multiple transportation effects of US refinery
demand, the strategic context may shift to the single proximate cause,
refining capacity itself. If refining capacity were to be statutorily
limited to supply of domestic demand, either by limiting refined
product export in the same manner as crude oil, or by decommissioning
excess capacity (with the caveat that environmental and national
security concerns could more directly collide), then there would be a
ripple effect across global oil markets.
In this scenario, as US import demand wanes a corresponding shortfall in
accessible global refining capacity would increase the economic
importance of non-US refining operations. To the extent that North
American oil production quality deviates from that of imported oil, low
quality North American oil production would become stranded or the cost
of refined products would necessarily increase in dollar and carbon
output terms. There may be other knock-on effects that are difficult to
predict, similar to anticipating where exactly the water filled balloon
will expand when squeezed.
Sound far-fetched? Consider the impact of Ultra-Low-Sulfur-Diesel (ULSD)
legislation. Since the implementation of ULSD in the US a decade ago,
distillate production with sulfur content below 15 ppm has risen from
0% to over 90% of total distillate production, which has grown
approximately in line with overall petroleum products. Any additional
cost of refining lower sulfur distillates seems obvious, but there was
also a knock-on effect that impacted global graphite markets and
possibly electric car production.
Increasing distillation to reduce sulfur content requires a heat source,
and to minimize costs refiners cannibalized their production of
marketable petcoke, effectively recycling a byproduct of the
distillation process by feeding the petcoke back into refineries. Total
petcoke production since ULSD has been relatively stable, but the
amount of petcoke supplied to end markets has fallen dramatically.
Marketable petcoke serves as a feedstock for synthetic graphite, which
is used in multiple products including lithium-ion batteries. The
negative supply shock in the synthetic graphite market caused a
reciprocal demand shock in natural graphite markets, and a
corresponding jump in natural graphite prices.
Capital markets responded with a redeployment of capital to Greenfield
graphite projects, and a simultaneous marketing effort that erroneously
identified the demand shock culprit as demand from electric car
producers. Ironically, the longer-term effect of reducing sulfur
emissions may be to hinder more attractive electric car pricing, and
thereby overall reduction in carbon output and fossil fuel reliance.
What will be the ultimate impact of recent changes in US oil markets?
Only time will tell, but historically change has signaled opportunity,
with greater change opening the door to greater opportunity.
About PF Group Inc.
PF Group Inc. is a specialized consulting firm that provides bespoke
strategy and analytical consulting services. The principals of PF Group
have a wide range of experience in capital markets, corporate strategy,
and research. For more information please contact Patrizia Ferrarese
This research is provided for information purposes only and does not
constitute an offer or solicitation to buy or sell any designated
investments as may be referred to herein. This material is prepared
for general circulation and does not have regard to the investment
objectives, financial situations or particular needs of any person.
Investors should obtain advice based on their own needs for the purpose
of making an investment decision. PF Group Inc. does not accept any
liability whatsoever, any direct or consequential loss relating to any
use of the information contained in this research.
SOURCE: PF Group Inc.
For further information:
Patrizia Ferrarese +1.416.554.6443.