since mid Oct oil has been trading in a narrow range 70-75 usd brent. i understand oil trading rangebound makes cracks & spreads largely demand dependent (at least this is how i read these charts), which in this time of year usually trends up. i also assume when oil volatility is higher, there might be much more moving pieces (reasons for higher volatility etc etc). i wonder if in your research studies you have by chance encountered evidence or come to a conclusion what might be the optimum oil price range to simplify the forecast of cracks and spreads to usual s&d seasonal patterns. i remember euronav has mentioned in one of their reports from prior decade usd 60-80 price range is the perfect one, wonder if it's still valid.
There does tend to be a kind of “sweet spot” for both consumers and producers around $70-75 where all demand can be satisfied and producers can make money, with neither excessive inflation (due to rising energy, which is such a key input) or excessive price drops (which make running an energy business uncertain and discourages CapEx).
(The added benefit of the current bear narrative is that a lower range hurts Putin and Iran. But that is another subject.)
Refineries prefer a range because it makes their business more predictable. They have various ways of hedging, but an environment without spikes and margins (cracks) grinding higher — like we have now — is v. positive.
Some will still go out of business, or CHOOSE to run at lower utilization (see: China) which is ultimately a good thing, as it will support cracks.
Thank you, Ed! Great educational stuff!
since mid Oct oil has been trading in a narrow range 70-75 usd brent. i understand oil trading rangebound makes cracks & spreads largely demand dependent (at least this is how i read these charts), which in this time of year usually trends up. i also assume when oil volatility is higher, there might be much more moving pieces (reasons for higher volatility etc etc). i wonder if in your research studies you have by chance encountered evidence or come to a conclusion what might be the optimum oil price range to simplify the forecast of cracks and spreads to usual s&d seasonal patterns. i remember euronav has mentioned in one of their reports from prior decade usd 60-80 price range is the perfect one, wonder if it's still valid.
There does tend to be a kind of “sweet spot” for both consumers and producers around $70-75 where all demand can be satisfied and producers can make money, with neither excessive inflation (due to rising energy, which is such a key input) or excessive price drops (which make running an energy business uncertain and discourages CapEx).
(The added benefit of the current bear narrative is that a lower range hurts Putin and Iran. But that is another subject.)
Oh one other point:
Refineries prefer a range because it makes their business more predictable. They have various ways of hedging, but an environment without spikes and margins (cracks) grinding higher — like we have now — is v. positive.
Some will still go out of business, or CHOOSE to run at lower utilization (see: China) which is ultimately a good thing, as it will support cracks.