Refiners' Tough Call: Do Fall Maintenance Or Pump Flat-Out? (Damned if they Do and Don't Dp)

By THADDEUS HERRICK Staff Reporter of THE WALL STREET JOURNAL September 28, 2005

With profit margins soaring and political pressure building to increase gasoline output, the nation's refiners face a dilemma as their fall maintenance season nears.

Going ahead with the maintenance schedule would mean shutting down refinery production, adding to the shortfalls caused by hurricanes Rita and Katrina, and keeping gasoline supplies tight and prices high. But postponing maintenance, needed to keep their refineries in top running condition, could increase the chance of accidents, potentially disrupting even more production.

For competitive reasons, refiners usually disclose little about their exact maintenance schedules. But Valero Energy Corp., of San Antonio, says it intends to put off any maintenance that can be safely deferred to continue producing as much fuel as possible. San Antonio-based refiner Tesoro Corp. is forgoing maintenance at its Golden Eagle refinery near San Francisco until the first quarter of 2006, though the company says that decision was made some time ago.

Refineries are -- just at the moment -- no longer the issue, no matter how much the LSM and ''common wisdom'' wish to point at them.

The plain and inarguable fact is that, from the date of Katrina's landfall to the present date, not one single barrel of crude production and not one single MMBTU of natgas production has been restored in the New Orleans (Eastern) district of GOM production area.

There is clearly huge damage to the underwater pipe, which damage is further indicated by both BP and Shell intending, as announced today, to send barges out to several of their GOM platforms to transport crude back to both LOOP and their refineries.

Of the principal financial news sources, unbelievably, only Investor's Business Daily has even mentioned this unfortunately obvious fact.

Evidently, none of the real players will even comment on this situation. Not Baker-Hughes, not ExxonMobil, not Shell, not BP/Amoco.

Of my 30-odd mkt sources whom I consult regularly, exactly two had any comment at all, and one of them isn't worth repeating, being essentially ''mind your own business''. The other, a regional production manager for XOM, did (more or less) lay out what is occurring when I goosed his a$$, but later said he'd call me a stone liar in print if I broadcast what he did tell me.

As anyone who knows me, and anyone who has read my assorted postings here and/or elsewhere, I'm the original ANTI-alarmist about energy mkts, and have been for years.

This time, however, Houston, we HAVE a problem, a huge one. No one in the industry (that's the ''awl bidness'', for you bluestaters), is willing to step up and say that GOM pipe damage may last for X months. One can transport crude by barge, and perhaps the supply situation in crude won't be so bad, given SPR is still chockfull of crude.

However, these same possibilities do not apply to natural gas.

Plain English and no BS: if the GOM gas pipes, or large sections of them, are down and cannot be put back into service until mid-winter or spring, you are going to see a price spike in NG so severe that the recent runup in motor gasoline will very shortly come to seem like amateur night by comparison.

I strongly commend your attention to, among other sources, www.energyeconomist.com or www.wtrg.com, and would recommend very strongly that you look over the daily commentaries in energy newsletters, particularly those of the past week or so. There may perhaps be an energy production statistician in our huge nation who has a better analytical track record than James L. Williams, the author of the commentaries appearing on these two named sites, but I cannot undertake to name that person.

Bottom line? Some things had better start going ''right'' in the next month or so, that is, normally in the GOM fields, or you flat-a$$ aren't going to believe what happens to energy prices this winter, esp. should we see a very cold one, and ESP. in New-shoulda-traded-it-to-Olde-England.

FReegards to all, but we can very easily get into super-deep, er, sheep this winter, given current circumstances and a cold or very cold winter...and those who are supposed to report events in the energy mkts are sitting with their thumbs stuck up their respective collectivist bums.

I am neither a stock trader nor a stock picker, but if I had to select an area that would seem to rate to be very profitable on a continuing basis for some time to come, I would look at energy service stocks. Infrastructure, pipeline, pipe chemicals, etc. I haven't followed Baker Hughes in years, but might consider those shares with a bit of research.

Premcor, in a somewhat different area, seems to me to have their entire game going on all cylinders. I still love Canadian Royalty Trusts, particularly Shiningbank...but it may be too late to enter those and related shares. Permian Basin Trust (NYSE) is unquestionably a middle-term buy on a $2-3 dollar dip. These do occur in those shares, and as a rule rather suddenly, so stay alert. Equally, I wouldn't dream of buying most energy shares just now; sure, assuming that the energy mkts might go completely cuckoo, one might make a tasty profit by being long energy shares.

However, given the same assumption, one will make far more dollars by shorting (or buying puts on) sub-prime mortgage lenders.

I also want to look at OCTM outfits such as Maverick Tube...but only on dips. If we should see a real energy pricing crisis, the shares of those who can provide new and/or replacement energy infrastructure in a timely fashion will be worth diamonds (well, a whole lot, anyway -- poor metaphor, sorry -- diamonds aren't worth crap, that's the original artificial market).

(Full disclosure: at this moment I own quite a bit of Shiningbank, but neither own nor am short any shares at all of any other company mentioned in this post.)

FReegards and good trading to you !

This mkt, right now and in the next 90 days, could easily become the scariest bull mkt ever seen on this planet. If events fall wrong, NG will end up making the Hunt brothers attempted corner in silver in 1978-9 look like The Little Sisters of The Poor having a good day in collections.

NG is entirely a local N. American mkt, LNG supplies to this mkt are minimal (thank you, you stupid-a$$ politicos and green weenie whackos), and there is NO replacement for it, either as feedstock or for heating.

I'd really rather be wrong about the situation in GOM right now...but I'm scared to death I'm actually too right.

And, at some point, someone is going to have to ask a VERY hard question: why are these absolutely inarguable facts NOT being reported by our alleged ''news'' media.

Frankly, I'm baffled at this. The LSM must be operating on sheer ignorance; this mkt situation has great chances of being the story of the decade, literally.

But, there's no real way to bash Mr. Bush over the NG situation, so I guess most of them haven't any interest in the story. This has been decades in the making and has taken and will take thoroughly atypical weather to keep going. Much more dangerous and volatile than crude, by a factor of at least 6, I'd say (basis historical pricing).

FReegards, and good infrequent trading to you!

;^)

I appreciate your insight! When I was much more of a stock weasel than I am now, oil/energy/NG was a sector that I rarely touched. Why? Well, what was useless crud in Y2K+/-? Who needed oil? Especially at $9/bbl "forever"? We had eyeballs! Didn't need no oil!

And the other thing was, oil stocks moved so much more stodgily, in looooong drawn out cycles that were, well, boring, and they trashed my timing for everything else. So I traded ESV a bit...$15, $18, IIRC. Now? $45.

Wrt the Hunt/Ag comparison...my understanding is that the COMEX doubled or tripled the margin requirements on the Hunts, who were leveraged up the wazoo, forcing them to liquidate and producing the waterfall off $50 Ag that hasn't recovered anywhere near since. (Tho...I'm bullish on Ag to $10-$12) Anyway...pure speculation is dicey and memory is hazy. With NG, we're talking compelling fundamentals and in my shallow opinion, no single "cornerable" source.

I think you're right, though. Even a "mid-case" scenario for NG looks awfully tight. Consider: Maybe the best way to play NG is.....coal.

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