U.S. refinery business ‘can’t catch up’ with oil prices, analyst says

The Energy Word Founder Daniel Dicker joins Yahoo finance Live to discuss the rise in oil prices as well as the outlook for the oil, gas, and energy market.

Video Transcript

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JULIE HYMAN: We mentioned it earlier, crude oil futures are up again, following a two day decline. That’s after a new report showed US gasoline stockpiles tightened ahead of the summer driving season. The American Petroleum Institute reported inventories of gasoline dropped by 4.22 million barrels last week. We get official government figures at 10:30 this morning.

Here to discuss the current state of the energy market is the Energy Word Founder Daniel Dicker. Dan, it’s great to see you. Thanks for joining us this morning. We’ve been watching this issue very closely, the issue of inventories and refining capacity, and how quickly refiners can make enough gasoline to meet with demand. What’s your assessment of this situation?

DANIEL DICKER: You know, we’re finding it’s a very, very interesting piece of the energy puzzle, Julie. We haven’t had a major refinery built in this country in 60 years. It’s always been a very up and down business. It’s not like oil. Oil goes up, oil goes down. You make money when oil goes up. We make– you lose money when oil goes down if you’re a producer of oil.

If you’re a refiner of oil, you’re looking for a margin. It’s a margin business. You take crude oil and you turn it into products. You turn it into diesel. You turn it into heating oil. You turn it into gasoline. You turn into jet fuel. You turn into all sorts of things.

And those margins change not too much. They’re really thin margins. Usually, somewhere around $2.00 to $5.00 a barrel between the products and the crude itself.

Now, in bad times, refineries are just terrible. I can recall something like Valero trading in the teens. Now, it’s trading, I think, $100– $140– $125, you know, a share. So it’s not the kind of business that drives new investment in it. So the old investment is they’re trying to make up.

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You know, in a moment when there’s absolutely, you know, zero supply and they’re running as fast as they can, and they’re keeping these refineries two refineries together with, you know, duct tape and bailing wire. And the prices for gasoline and diesel– even when you look at $110 barrel crude is just sky high. It’s basically pricing as if crude oil was closer to $200 a barrel. And that’s just a function of, you know, the refining business, and how far behind they are, and how they really can’t catch up at this moment.

JARED BLIKRE: Well, Dan, always great to see you here. Talking about– sticking with gasoline, there’s a JPMorgan report calling for $6.00 per gallon gasoline. And they’re saying a major driver in these counter seasonal draws as gasoline is higher than normal exports. And I just read that Saudi Arabia, OPEC+, failed to meet their output quota by 2.7 million barrels last month.

Is OPEC doing this on purpose? Are there serious shortfalls in the world in terms of drilling? Why exactly is– would some of these members not want to pump more?

DANIEL DICKER: Well, you know, that’s a deep question, Jared. Let’s see how far we can go into this in the time allotted. I mean, look, there’s been a– at least on paper, there’s been a commitment from OPEC to increase production.

But as you just pointed out, in terms of actual increases of production, they’re less than thrilled to put oil back into the marketplace. Right now, I mean, let’s be honest, they are– they have looked at five, six years of very, very bad times. We saw oil prices that were negative during 2020 at least for a day.

And this uptick in oil prices is a boom for these countries and for US oil producers as well, who’ve suffered with negative returns for five or six years. So they’re not particularly, you know, thrilled to add a ton of– you know, balance the market, you know, at a time when they’re finally making back some of the money they lost for five or six years.

Now, we can discuss the morality of this. But you’re absolutely right, the ability of many of these producers to increase production is, in fact, limited. But also, their will to increase production is equally limited. So make of that what you will.

JULIE HYMAN: Dan, we got to leave it there today, but we will definitely catch up with you again soon. The Energy Word Founder Daniel Dicker, appreciate your time here this morning.