When oil was discovered in Ohio, way back in the 1870s, refineries could not process it. Ohio oil had different chemical properties than the Pennsylvania oil refiners were accustomed to. Finding a solution, and keeping it to himself, helped John D. Rockefeller gain control of the resource and create the Standard Oil empire.
His other secret weapon? Pipelines. Pipelines transport oil at a lower cost, and with greater safety, than anything else. Building and controlling the pipeline networks gave Standard Oil control of the market.
Most U.S. oil majors are descended from the Standard. Exxon Mobil (NYSE:XOM) originally combined Standard Oil of New Jersey with a Texas oil producer, Humble Oil & Refining. XOM was originally Standard Oil of New York.
Something like that Ohio problem is hitting refiners now, and oil majors are taking advantage. That’s why, despite low oil prices, oil stocks Royal Dutch Shell (NYSE:RDS.A, NYSE:RDS.B). XOM and Chevron (NYSE:CVX) all reported big quarterly profits last week.
Oil Prices Vary
Oilprice.com lists hundreds of different grades of oil. Most trade within a narrow range, based either on what’s called Brent Crude, which comes from the North Sea and is considered a “world” price, or West Texas Intermediate, which is considered the “U.S.” price.
But it’s not that simple.
Depending on pipeline capacity, and the chemical properties of the oil, the price can vary considerably. What’s called “Western Canada Select,” bitumen mined in Alberta and then mixed with natural gas liquids for transit, sells in the low-40s per barrel. “Bonny Light” oil from Nigeria, easily refined, collected offshore, transported by tanker and part of OPEC, sells for over $63.50 per barrel.
There are even big opportunities in domestic oil. High-sulfur “sour” oils from Texas usually often trade at under $40 per barrel, but those prices are rising as refiners scramble to replace Venezuela supplies creating vast trading profits.
Then there’s the fact that the prices quoted may not be accurate. The industry and the Department of Energy have recently differed by as much as 400,000 barrels on the amount of U.S. oil in stockpiles.
Take It Away
International oil prices vary based on the cost of transport. Tighter supplies from OPEC can buoy U.S. oil prices, but only if traders can find tankers to transport it to where it’s needed.
Early in this decade, when oil prices were high, trucks and trains were needed to get supplies from North Dakota’s Bakken formation. It was a scramble Rockefeller himself would have detested, but the result was that Bakken oil traded at a big discount to Texas oil, even though the products were nearly identical.
Today, supplies in the Permian have overwhelmed the pipelines and, until new pipelines are completed, it’s this “good” oil that’s trading at a discount.
The Oil War
There is another opportunity for the majors, which is the use of oil as a weapon of war. The Trump Administration is now using oil as a weapon against Iran and Venezuela.
Europe can sidestep the Iranian sanctions with special payment mechanisms but the problem is more acute in Venezuela, where getting oil out of the ground requires naphtha, about 90,000 barrels each day, to dilute the oil and let it flow. Venezuela had been getting naphtha from the U.S., mainly from those Gulf Coast refineries. Lack of naphtha could also take Venezuela off the market entirely until the crisis is past, which is what the Administration wants.
Whatever the solution, taking Venezuela oil out of the market also takes some U.S. refineries out of it. Higher gas prices and higher refinery profits may follow.
The Bottom Line on Oil Stocks
Getting around sanctions and transport bottlenecks is more profitable today than ever before.
Chinese oil refiner China Petroleum & Chemical (NYSE:SNP) learned this the hard way last quarter. It lost $688 million during the quarter because it’s just a refiner, without access to the supplies, pipelines and tankers that can help it arbitrage lower prices.
That’s why the big winners among today’s oil stocks are the oil majors, especially the U.S. majors, and they are your best oil stocks to buy right now.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a postiion in any of the aforementioned securities.
