Green Sheet

Valero's Refinery Shutdown Means The Real Economy Sucks

Joe Weisenthal — Sun, 22 Nov 2009 10:37:00 -0500

On Friday, oil refiner Valero (VLO) announced the completely shutdown of a plant in Delaware City, resulting in the loss of over 500 high-paying jobs.

Edward Harrison of CreditWritedowns.com argues that the fact that Valero had to shutdown this plant -- which was losing about $1 million per day -- indicates that the real economy, where consumers actually buy gasoline at the pump (as opposed to the financial economy, where barrels of crude trade at elevated levels), remains quite week.

The new CEO Bill Klesse came to Valero via Ultramar Diamond Shamrock (UDS), which Valero acquired at the top of the market in 2001. So, company ethos may be different than under Bill Greehey who was very committed to community. And Delaware City is an old Getty/Shell-Motiva oil refinery and a legacy asset of Blackstone-controlled Premcor, the company run by former Tosco head and Salomon Brothers commodities trader Tom O’Malley. So, it was not core to Valero’s operations. Valero already cut staff there in September. And the Shell-Motiva JV had serious operating difficulties with the asset before offloading it to Premcor.

Nevertheless, this was a refinery which has been upgraded significantly to process less expensive heavy, sour crude oil. The fact that Valero is laying off workers and shuttering the entire site tells you that the situation is bad. They are saying in effect “we cannot continue to operate at a loss through this business cycle.” If Valero can’t make money, no oil refiner can.

I see this in a macro context as a sign of cyclically weak end-user demand. I do think peak oil is for real but the world is awash in oil and oil products right now. Read the whole thing >

He points to this FT Alphaville piece as a backup for the last part that the world is "awash" in oil products.

We feel it’s Olivier Jakob at Petromatrix who really expressed the matter best on Friday. As he wrote (emphasis FT Alphaville’s):

As per our Tuesday ad hoc note on floating stocks; on a crude equivalent basis all of the OPEC and half of the IEA estimated oil demand growth for 2010 is already parked at anchor in floating stocks and these idled cargoes filled with oil are getting more and more attention.

By the end of the winter there is likely to be as much distillates afloat as in the total US at the end of winter 2007 and we expect that it will be more and more difficult for some of the Wall Street commodity banks to avoid mentioning the subject and to continue to hide the floating storage fill-up as “demand from emerging economies”.

The ICE Gasoil contango is currently widening and this will not work towards the reduction of these floating stocks. In an environment of spare refining capacity the only solver to the growing floating stocks of Distillates is a sharp reduction in OPEC supplies [ahem…Daily Mail], but only lower prices would trigger that.

The only answer that we see to GOD (Glut of Distillate) is a flat price correction sharp enough to force more OPEC supply cuts.

Indeed, the realization that end-user demand is not all its cracked up to be has been emerging all week.

Our Vincent Fernando noted on Tuesday:

Last week was particularly worrisome for oil, since U.S. fuel inventories (distillate stocks) rose during a time of year when analysts expected a drop. The American fuel glut continues due to weak demand, and as shown below, is far worse than anything seen in recent years.

Even if U.S. fuel demand picks up with the economy, the U.S. will first have to work down its massive distillate stocks before needing more oil. This process will keep a lid on America's contribution to world oil demand.

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