Modeling the USGC Refining Market

Modeling the USGC Refining Market

I had planned to continue to discuss the impact of oil prices beyond the obvious.  In the first report on the impact of oil prices in the non-obvious areas, I discussed the likely impact to the Renewable Fuel Standards.   I was hoping to follow up that report with the impact on condensate value as a result of the crude oil collapse.  However, this has lead us into reviewing our refining models and also how the refining industry will likely have to evolve to handle the RFS.

As with many things in the energy market, you start with a hypothesis and investigate it only to be compelled to look at other areas in the market place.  We are almost ready to release our first oil product, Oil Market Analysis (OMA), but first we had to make sure the refining models represented the USGC and was designed to incorporate the impacts of RFS.  In this article, I have decided to go ahead and give you a tour of my problem solving methods when it comes to modeling USGC Refining Markets.

A key path for how I analyze the energy markets is to take a walk back in time.

Historical Changes in Refining

The yields of the USGC refiners have changed.   Distillate yields rose while gasoline yields had the largest drop off.

This was not a result of refiners’ strategy from the 90’s nor was it because of the crude slate changes.   The primary driver for this change came from the market price change starting in 2005.

The EIA Annual Energy Outlook  (AEO) was forecasting distillate spread to gasoline to be negative until the 2010 AEO release. The current AEO 2014 shows the spread averaging over $0.3/gallon.   As with all free markets, they adapt to the pricing incentive.  This change necessitates the adaption of the USGC refining configurations.  This is also one of the reasons condensates are poor crudes relative to other crudes in the market as the distillate yield is very small.

The quality changes did help the refineries produce more distillate, but many planned to expand and run their Catalytic Crackers and Hydocrackers.   The price incentive has resulted in cutting back how hard those units run.

Calibrating USGC Refining Model

The first piece for calibration is putting a recipe of crude oil entering the USGC cracking and coking refineries.   The average API for the last 12 months average around 30.2 API and 1.7 %S.   The import data shows the major importers of oil for USGC are the Saudis, Venezuela, and Mexico.   A crude slate from each of the countries were selected.  Most of the import volumes were sent through the coking refinery.  For those not knowledgeable in refinery – all coking refineries do have “cracking” capability via hydrocracker or cat. cracker.  A blend of LLS, WTI, Mars, and Condensate represented the domestic blend.  The volume on the domestic side went through both a cracking and coking refinery.  The final recipe produced an average 30.5 API and 1.7% S.

Both refinery configurations were then adapted to produce similar yield seen in the market place.   The refinery levers represented modification in cuts going into the various units along with conversion capabilities.   We also looked at the market signals from octane values to maximize the refinery capability to produce high octane components.

Octane pricing is a story in itself.   The increase in value corresponds with the increase in condensate production.   Condensates typically produce low octane products – another issue for condensates.

The final production of our represented cracking and coking unit in the USGC produced the following yields compared to the actual market production.

We then review the historical refining margins produced by the model depending on configuration and crude oil.  The issue is whether we account for the ethanol requirement.  As a crude produces more gasoline, the requirement for ethanol purchases are needed.  Balancing some of the cost is ethanol octane is at 115 vs. 87 spec.  For comparison, we use the simple 3-2-1 crack spread commonly used in the market place ( [2 x Gasoline Price + 1 x diesel]/3 – Crude Reference Price).

The yield and final market margins are the key step to how well your model is performing.  Similar to our extensive work in calibrating our power models, we put the same effort into the refining models.   We believe in transparency and show all our calibrations.   As with any model, one can continue to improve upon it over time, but we will not be stuck in analysis paralysis.   For vintage #1, we are pleased with the results.

Work in Progress

The results are promising.  We will be filling our yield tables with various crude assays.   The outcome of the work – Oil Market Analysis (OMA) – will produce monthly market expected refining margins based on the future markets.  There is no need to wait for your consultants to put out a report days to months after the market has moved.  OMA will be updated at the end of every business day keeping you on top of the market changes.  The analysis will indicate the expected refining margins for gulf coast refiners.   This will be helpful in guiding the valuation and expected earnings for USGC refiners.

An interactive website will be developed allowing users to select various crudes.  This can be used to help guide crude oil optimization from pricing for contracts to informing buyers and sellers of arbitrage opportunities.   The interface will also allow users to upload their own forecast of petroleum products or choose from All Energy Consulting custom forecast.  With this capability, a user can customize and create endless amounts of insights.   An end goal will also be to allow users to upload their own assays to be automatically run through our models.   Currently, we can do this manually as this process requires some tricky programming to automate this feature.

Another thing we can offer is generating a model for East Coast, Midwest, and West Coast.   The process and procedure will be similar to the above.   Also, an international model could also be possible if we can find the information needed for calibration.   Using this model, I plan to produce a report to calculate the value of condensates and further delve into the rapid growth in octane value.

Lots of fun analysis to do – who needs to sleep or eat?

“People who love what they do wear themselves down doing it, they even forget to wash or eat….When they’re really possessed by what they do, they’d rather stop eating and sleeping than give up practicing their arts.” Marcus Aurelius, Meditations

Your Tireless Energy Analyst,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

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Quantifying Power Price Risk

Quantifying Power Price Risk

Given our completed summer 2015 analysis and our last power discussions centered in the East, we head West in this example analysis and quantify the risk in Mid-Columbia (Mid-C) power hub on a high level.  In order to make an effective decision, one requires knowing more than the fact that higher gas prices, higher load, and lower hydro generation produces higher power prices – but by knowing the extent and the probabilities this leads to effective decision making.  Power Market Analysis (PMA) is built to deliver you this knowledge by using AuroraXMP by EPIS and following the fundamentals of power modeling as described in the whitepaper.

Current Mid-C Market

Examining the Mid-C On-Peak power curve, we see some very interesting results.   The current forward curve for the summer rises from $22/MWh to $30/MWh by the end of summer.  To many, these prices are likely extremely low.   However, this is what you get in a hydro based environment with $3/mmbtu gas prices.  Based on our preliminary analysis, it would indicate the prices can actually be much lower for many of the summer months.  We ran over 60+ simulations for this summer.

Weather Analysis

To understand weather, we ran the last 11 year actual weather patterns and generated a new load forecast under those parameters.  The weather changes in the region over the last 11 years are not that impactful in the summer.   The largest standard deviation was in August at less than $2/MWh.  This makes sense given the temperate summer weather in the Northwest.

Gas Price Analysis

To understand the impact on gas prices, we changed gas prices from $2.5/mmbtu to $6/mmbtu in 10 cent increments.  The graph below displays the results in 50 cents increments.  Holding all other variables constant, the changing gas price can have a standard deviation impact of around $8/MWh.  The graph indicates the futures market is anticipating a higher heat rate than the model or the power trader’s sense higher gas prices by $0.5/mmbtu either through basis or Henry.

Hydro Analysis

By far, the biggest risk to Mid-C is the hydro conditions.   We examined 70 years of hydro conditions and used the 1929 case for the low hydro year and the 1997 case for the high hydro year.  The forward curve is likely concerned about a low hydro year given the issues from the past few years.  However, the prices can fall significantly if a hydro year similar to 1997 was to occur.

Potential Actionable Items

The use of such analysis is only valuable given your circumstances.  The results of this analysis requires understanding you particular situation.  At All Energy Consulting, we will collaborate with you to help you make the most effective decision.

End User

If I were an end-user with a good or service which is dependent on energy cost, I would consider locking in September pricing.  If usage is low in May and June, it would indicate not locking in power prices those months.  Depending on usage and risk tolerance, July and August could be too risky to lock in.

Power Generator
The low gas prices are causing much pain for the bottom line.  However if you haven’t hedged that risk already, it may be too late.  The declining gas price risk, given the strip currently $3/mmbtu, has a diminishing impact on power price.  A 50 cents move up has more impact than a 50 cent move downward.   I would monitor the rainfall and start selling some positions in May-July.  I would request an Off-Peak analysis to further inform my decision.

Load Serving Entity
Off peak analysis is needed.  An overlay of the usage curve along with the on-off peak prices will confirm the need to lock in prices for August and September.

All Energy Consulting can take this type of risk analysis and work with you to apply it to your situation and produced a comprehensive no-regret strategy and implementation plan.  We have all the information for your region and can supply you with and even more complete risk analysis.  We cover the entire N. American market and produce On-peak and Off-peak prices for all the major hubs.  Our near-term simulations can produce a three year projection.  We also offer a long-term solution covering the next 30 years.

We add value in your energy buying needs by offering in-depth analysis in order to empower you and make you confident in your energy decisions.  Please do consider All Energy Consulting, we help all types of clients from power generators to end-users better understand the energy markets.

Your Looking Out for Your Success Energy Analyst,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

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Oil price drop impacts beyond the obvious – Part 1

Oil price drop impacts beyond the obvious – Part 1

I am analyzing many areas as a result of the oil price drop.  There are a ton of discussions of oil price drop and the impact it will have on oil production and economy.  However there are impacts at the secondary level which can have billions of dollars of impact on the market.

The oil market drop will impact the Renewable Fuel Standard (RFS).  EPA suspiciously delayed the  release of the Renewable Volume Obligations (RVO) for 2014 twice.   With the latest oil price drop, I suspect they will have support for revising and recalculating gasoline demand expectations, which will then thwart any attempts to modify the RFS.   Most of the support for revising the RFS requirements was due to falling US gasoline demand and the theoretical limit of the amount of ethanol allowed in the market – aka “blend wall”.   This is based on gasoline with greater than 10% ethanol will impact the mechanical aspect of the existing auto fleet.  I will not argue the point surrounding this and save that discussion for another time.   Given this conclusion, I do anticipate you will see renewable identification number (RIN) prices move up once they do finalize the 2014 and 2015 volumes in the spring.

What are RIN?

For those not involved in the power markets, you will be slightly lost.  For those who have gone through the trials and tribulations of the Clean Air Act (CAA) and the emissions markets the government created in order to create an “optimal” path to emissions reductions – it is very similar.   Very similar to SO2 and NOx markets, the government assigns a target of volume and produces a certification for each unit of volume.   The only difference this time is rather than wanting the volume to be reduced, they want the volumes to grow.   Instead of assigning an emission credit, they assign a production credit.  As a producer of gasoline or diesel, you are required to obtain a set amount of RIN for each volume produced.   One can do this by physical blending and/or purchasing a RIN.  Another difference is instead of assigning a multi-year level of commitment ahead of time as they did in the CAA, the EPA is supposed to assign it each year in the spring.   The market does have a general idea given the RFS does state targets, but as a fuel producer you don’t know your specific requirements.   The brilliance of this design, and at the same time the most confusing, is the banking system which is very similar to the CAA construct.

The RFS includes the magical banking system.   They have learned from the initial CAA markets and have adopted the banking restriction similar to the NOx markets, but actually slightly easier to follow as they limited the banking system to 20% of the total RVO for each year.  There is no decline in values on vintage basis.   The vintages from each bank can be carried into future years. The banking system is the greatest invention since slice bread for those into Operations Research and Game Theory – my two favorite subjects.   I have spent much time in the analysis of emissions banking and game theory, and I presented to AEP management the relationship between the CAA emission markets and the Nash Equilibriums which can be generated.   Funny enough Dr. Nash grew up near one of AEP power plants, which I believed is pictured in the movie – Brilliant Mind.   There are fixed outcomes for these types of systems.   They are equilibrium points when all market participants achieve a certain goal.

I was the lead proponent in AEP to sell the emissions credit heading into the newly created NOx market in 2005.   The NOx market once introduced and, upon an extreme winter, decided to go crazy.   The prices of NOx went over $5500/ton.  This far exceeded any of the equilibrium points.    The other nuance you need to realize in markets which turn in a credit on a fixed date is the cost of a credit in a given time is somewhat irrelevant since the only real value of a credit is when you turn it in.   If you want to make money on a system like this you had better spend time on the end market vs. what the market is now.   Starting the NOX season with a huge rise in price was pointless, and one could run 50+ simulations and show even the hottest summer could not generate a demand level of NOX that would necessitate the price above the highest market equilibrium point.   In the end, after a few years, the market achieved one of the lowest equilibrium points – variable cost of running the control equipment.

The other unique aspect of the RFS is the three levels of targets – Conventional, Biodiesel, and Advance.   In theory, and so far in practice, this is the order of greater complexity and cost.   The order also represents the highest volume targets to the lowest.   The rules do allow one to use a credit from the more complex target into the simpler target not vice versa e.g. Biodiesel RIN can be used for Conventional RIN.

RIN Future

With the lower oil prices and the market structure with banking, I don’t see how one anticipates the modification of RFS with lower goals.   The main argument of “blend wall” will succumb to greater oil demand as consumers not only drive more, but consume more.   The US will not likely save more given the design of our system and culture.   The very act of consuming more whether food or services increases petroleum demand.  The banking ability of 20% gives much room to buffer the changing weather from crop issues to the changing economy from driving.

The low oil prices will impact the economics of many ethanol plants, particularly those that have not been built.   On a sunk cost analysis, the economics should allow them to continue to produce ethanol.   This situation only leads to even greater value for RIN.   The trading and risk mitigation of RIN need serious consideration for those producing transportation petroleum for the US or for those making the RIN.  At All Energy Consulting, we can take our knowledge in the emissions and petroleum market to help you weather the storms of the RIN market.

Other topics to come due to the drop in crude oil prices – Condensate Value …Octane Value…..

Your Energy Analyst Thinking Beyond the Obvious for Your Success,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

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Summer 2015 Best Trade Update – Already?

Summer 2015 Best Trade Update – Already?

The purpose of this release is to demonstrate the volatility and requirement to stay on top of the power market.   PMA-NT is capable and designed to run daily.   Our best trade for summer 2015 spread just moved from $-2/MWh to $1/MWh.   The risk adjusted expectations of this curve was $2/MWh.   There is still room for a 100% gain.   The certainty is diminished somewhat as there are some simulations showing less than $1/MWh – however there were none at $-2/MWh which made this trade spread a screaming buy.

Not to fret the market has another opportunity.  Based on last night’s run there is a shoulder month who offers this same opportunity.  The current spread stands at $-4/MWh and the risk adjusted spread at north of $1/MWh.   Historical analysis shows the spread to never be negative for the last 6 years.   The average spread on a historical basis is over $6/MWh!

Do you want the list of potential summer trades that never get stale due to market changes?  It is time you take a look at PMA-NT.  We produce daily trade ideas with in-depth fundamental analysis.  This is not a black box.   We are not running stochastic and creating a mathematical soup of results.   The realities of the world are examined in discrete runs.  PMA-NT gives you control of weather, commodity prices, unit outages, etc….  We can quantify uncertainty allowing you to make effective decisions and trades.

Please call me if you are interested in receiving the list of our summer trade recommendations and the analysis that goes behind it.   We are so confident in our modeling we offer very flexible terms that we get paid only if you get paid :

  • Fixed charge with a money back guarantee on a winning portfolio of recommendations (winning portfolio > 0%).

  • No money down a portion of earnings based on trade portfolio performance.

  • Subscription to PMA-NT gives you the complete summer analysis and all the daily runs each and every day.   Customization to create your own set of daily scenarios.

You won’t find a better package or deal when balancing the return expectations we can produce.  Many of you want to do all this internally.  I understand this and expect your team can.   However, as I noted before it only gets better when we incorporate your knowledge.  We are humble enough to understand we can’t cover everything, but we will continue to pursue that.  This is what makes this an evolutionary service/ product.   There is no sitting on our butts once we sign you up – we will continue to grow with you.  You can have your very own unique PMA-NT experience.  Your teams concepts and thoughts can be translated into PMA-NT.   Your internal simulations can also be incorporated in our trade screener giving even a more robust answer.  Finding the best power trades will only get better  and easier when you and your team work with us.

If you want to show a successful power trading portfolio you need to reach out to us as soon as possible. We are here for your success – now and into the future.

Your Enthused Energy Analyst,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

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Best Power Trade Summer 2015 – 100% Gain High Probability

Best Power Trade Summer 2015 – 100% Gain High Probability

As noted in my recent article, demonstrating the great performance of PMA to be able to find winning power trades – 50 Percent Gain on Winter Trade! Another Successful Demonstration of PMA, I prefer to trade one season out excluding the shoulders.   Unless something is a screaming buy or sell in the shoulders I typically avoid it given the limited load movements and unpredictable maintenance cycles.

Given our success in winter I wanted to get a jump start for summer so we have run over 60+ simulations for this summer.  Including our base runs and following the same analytical approach which incorporates a historical analysis and our screening tools, we have identified some significant market dislocations from the forward curve to the realities of the market place.

Also noted in my previous article, I believe I have demonstrated and documented the efficacy of the modeling approach with 3 correct calls in a row (SummerWinter 1Winter 2) .  Therefore, we will not likely give away trade ideas anymore.   The return of one of our spread trade we have identified is priced to earn over 100%.  This is no joke.  I have all the analysis behind this trade and look forward to working with paying clients to capitalize on this trade.   Power markets, given the collapse in trading and the complexity involved, do offer on occasions these types of trades.   This June spread will be able to give you positive returns in less than 4 months.

Trading power if done right will bring positive results.  The last two years the power trading markets failed as many traders failed to translate the low gas prices and what they meant to power prices.   PMA-NT is proven to understand these commodity changes and what they mean for power.  In addition, my trading recommendations stay away from these absolute issues and I focus on spreads and heat rates thereby mitigating some of the commodity risk.

PMA signals have recently changed from a sell mode for most of last year to now identifying some great buying opportunities.   For many end-users if you are looking to hedge power now is the time and we can show you why and where.  For several power generators my advice to you is ride it out enjoy the spot markets your downside risk is limited.  This is location specific so you do need to call or email me to get the right information for your situation.

Please call me if you are interested in receiving the list of our summer trade recommendations and the analysis that goes behind it.   We are so confident in our modeling we offer very flexible terms that we get paid only if you get paid (I got that from an infomercial):

  • Fixed charge with a money back guarantee on a winning portfolio of recommendations (winning portfolio > 0%).

  • No money down a portion of earnings based on trade portfolio performance.

  • Subscription to PMA-NT gives you the complete summer analysis and all the daily runs each and every day.   Customization to create your own set of daily scenarios.

This is extremely time-sensitive as the market will start correcting itself for these dislocations.   If you want to show a successful power trading portfolio you need to reach out to me as soon as possible.   We are here for your success – now and into the future.

Your Enthused Energy Analyst,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

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How low will oil go?

How low will oil go?

I tried to avoid this answer for many reasons.   My hesitancy in answering is due to my jagged edge of experience in trading commodities.  The price of a commodity, in a fixed given time period, does not have to hold any fundamental characteristic.  In today’s world of constantly being “online”, traders chase the next move through any means including reading into a statements made by OPEC members.   As much as today’s spot price of oil predicts the price of oil 6 months from now, the same applies to the futures market price (How much?  Answer: Not Much).

The price now for oil, whether spot or futures, represents the condition of buying, selling, and managing internal storage with a system of risk of tomorrows price.   If the market believes the oil prices can go lower, you have fewer buyers as they would rather use their inventory until a point the price holds too much risk it will be higher.   If the market believes the oil prices will go higher you have more buyers wanting to build inventory and will buy it to the point the price holds too much risk it will be lower.  There are losing and winning trades throughout the year.

Right now you have a bunch of “losers” who have locked in oil prices at way higher prices.  Hedging is dangerous when your market competitors don’t and your prices for your service/product can be eroded by competition.   There is not much intelligence when one hedges all your volumes at once.   A balanced hedging program should step into the changing markets.  An effective oil hedging program would have allowed the market to fall while gradually adding to the hedge over time.   Calling the bottom of the oil price would be as lucky as trying to catch the handle on a sharp falling knife from a 10 story building.  It is possible, but not likely.  An effective hedging program would let the knife fall and realize you won’t catch the bottom, but you won’t ignore it either.

The bottom price of oil will likely not occur without an event.   Traders need to see the market is responding before stopping the momentum of a falling knife.    Unfortunately, the oil markets are operating on sunk cost investments.  A reaction on drilling and production will take time.   I believe one of the first signals for a slowdown of production will not come from the physical production declines, but from the insistence of the debt holders to quantify what they own.   The operating company management team will likely go ahead and produce whatever they can – the debt holders will want them to stop so they quantify the volumes and use those volumes to payback the debt.  This will take time to play out via bankruptcy.   The other reaction to low prices will come from the demand side.   This is winter for the largest consumers of petroleum.   Demand can only rise so much now.   However, as we move into spring and summer, expect a rebound in demand.   The ironic statement is that the current market is not so trusting of the market to react.

Oil prices can continue to fall.  However, as a business, I would not be planning based on this market aberration.   The fundamentals will re-align the markets as real data and information becomes available, and actions by participants occur.  This could take as long as 6-12 months.  I still believe oil prices due to the global nature realign itself in 6-12 months north of $60/bbl.  Some have tried to compare the drop in oil to the drop in US natural gas price, which has not really rebounded.   However, US natural gas markets are not global – yet – and potentially never will be as LNG and GTL investments are likely being questioned with low oil prices.  The issues we discussed that will drive this market hasn’t changed - Oil Market Doomsayer.

If you are dependent on oil prices and have never hedged your purchase, this could be an opportunity to develop a systematic method for hedging some of your oil needs.  A true hedge creates a system to manage your budgets while balancing your business and energy risk.  Hedging programs should never be constructed to make money or save money.  If so, you are now trading, which is a valid business option if you have the appropriate experience.

Please consider All Energy Consulting for you energy consulting needs.  We add insights to the energy market for your success for now and years to come.

Your Energy Analyst Not Interested in Catching Falling Knives,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

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