Haymaker Daily A Crack in the Market's Oil "Logic"
Hello, Haymakers:
It's no exaggeration to observe that the current state of the oil market is unusual. For example, as we've often noted, crude prices in the upper $70s to upper $80s, are historically much lower than they appear.
Specifically, they were in this range almost 20 years ago, and considering that consumer prices have risen approximately 60% since 2007, oil is an inflation-adjusted bargain. In fact, in the fall of 2007, West Texas Intermediate (WTI) crude hit almost $98.
Of course, what makes this surprising is that almost no one on Planet Earth would have believed oil would be anywhere close to this inexpensive with the Strait of Hormuz still essentially closed. Additionally, egress out of the Red Sea, where about 12% of global crude supplies transit, is at-risk, as well.
Another current oddity is the crack spread versus the price of crude itself. Lately, they have nearly converged. Per the following Bloomberg chart, the crack spread — reflecting the cost of converting oil into refined products, like gasoline — is presently ~$66/barrel, while WTI is at $84.
[Bloomberg chart — crack spread vs WTI]
Even last fall, when the crack spread spiked as oil was languishing around $60, it was barely above 50% of the crude price. The current $61.80 crack vs $84.19 oil represents a ratio of 73%. This is unlike anything seen in the 21st Century (and, likely, in the 20th Century, as well).
Along with very strong demand for jet fuel, this would indicate global demand for oil-based products remains extremely robust. These realities run counter to the view that a key reason oil prices have stayed subdued, relative to the severity of the supply shock, is because of plunging consumption of refined products like gasoline.
In our view, the bottom line is that oil prices are far too low based on the continuing debacle in the Middle East as well as the high demand for oil-related products. Accordingly, sell-offs in crude, such as seen this week, are opportunities for accumulating oil and, particularly, oil-producer equities.
The Haymaker Team