Back in the day six weeks ago, I used to tell this joke when I was explaining how Platts was sending me on the road for the rest of the year to get the pulse of the oil markets.
I hate to travel, and I don’t like people, so this is perfect for me.
I have been known to fib to be funny in casual conversation, but there’s a little bit of truth in both of those things. I pack like a frat boy headed for South Padre, and I’d rather stick my nose in a book than carry on a conversation lasting more than 90 seconds.
A few weeks on the road have restored my faith, both in the crack operation of the Western Hemisphere’s finest airports and the good nature of the oil industry pros who are weathering this downturn like troopers and remain ready for crude to take the oil complex back up. Best guess for that to happen, from those to whom I have spoken, is sometime in 2017, but who knows? If you make oil predictions, you make incorrect predictions, I have been told in my travels. Maybe best to take Dev Patel’s advice.
The trip has restored my faith in something else, too.
A few times a day, I picked up on signals that capitalism always will sort things out. And the absence of competition can be like sticking a wrench handle into a moving fan.
That’s sweet, corn
I started in Brazil. The economy’s a mess. Even my gracious hosts agreed on that. One Real is worth about a quarter, not enough to get you 3 ounces of Pepsi in Houston. The beef in Sao Paulo from the ethanol industry is that the government is propping up sugar at the expense of corn. One consultant told a roomful of ethanol executives that the mentality of some in the ethanol industry is like that of “those who were helping out with the mom-and-pop store while Mom and Pop were driving it into bankruptcy” and suggested they needed to be doing more for themselves.
Yet there is optimism in isolated quarters. Should Brazil not be sending more ethanol to the United States? And this year petrochemicals giant and national oil company Petrobras affiliate Braskem has begun to import more naphtha from the US, filling a gap once dispatched to Petrobras. Both US and European naphtha traders see Brazil as a potentially profitable destination. The reach of open markets gets a little farther.
From Sao Paulo it was on to Minneapolis. One agricultural giant there wants to get more into trading and is taking on more staff in Houston. That’s not what you do when things look bleak. Another ag giant has an intriguing position in an emerging US energy market: pipeline line space.
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This company has legacy history on Colonial’s gasoline-only Line 1 from the Houston area to North Carolina. The line is cranking 24/7 at more than 1.3 million barrels/day. The company never uses the space and is able to sell it essentially for pure profit. No expenses out, money comes in. That’s a pretty good business model. Later in the trip, a trader at another company suggested we were all fools, himself included, for not quitting our jobs that minute to found a company together to deal pipeline space. We agreed that line space is essentially a business in which you get to charge for air.
The airports of the Midwest also got me thinking about markets. Airlines essentially sell a product that is the same across all companies: a seat for your butt from one city to another. Then they try to dress it up with Wi-Fi that doesn’t always work and other shiny baubles.
Southwest is still doing the cattle call for seats.
For me, that is like putting up a red flag in the Plaza de Toros de la Ventas. It’s a techonological challenge to get a good spot in the line. With 24 hours left before your flight, you always have a shot at getting the first spot in the A group. That gives you access to the exit row and a few extra inches. Plus, there is a little notch in the side of the plane where you can park your forehead and sleep without being jostled. Southwest has created a market without money in which its passengers compete for the best seats. I once warned participants in a business meeting that I would be taking a break to get my Southwest check-in. They were cool with it.
Being a little tech savvy helps. So does being an early riser. I am looking at you, Houston-to-Dallas flight.
The word from St. Louis is that it’s tough to get your hands on enough storage or pipeline capacity these days. Separately, one trader there noted that competitors who complain about volatility in the markets just don’t get it. “You have to have market volatility. If there is no market volatility, you don’t have a market,” he said. “You just have to protect yourself.” This trader said he finds a shield in more swaps plays in diesel and gasoline.
When I was there, Uber had just started in St. Louis with significant opposition from the taxi lobby, and I had an extended conversation about the international car service with another Uber driver in Minneapolis. He was a little overwhelmed by running a business in which his only asset was his car. I told him he had another asset, too: the Uber app. That thing puts his fate in the hands of thousands of people who would never even think about using the phone to get transportation.
Then an Uber driver in Chicago took customer service one step further. He knew when I was leaving for the airport and was sitting on my street when I was ready to leave. Then we hooked up via Uber once I was out of the hotel and in the back seat. I don’t think even Tinder works that well.
In fact, I’ve had an Uber story almost everywhere I have gone so far. In Brazil, I am told the taxi drivers of Sao Paulo sometimes beat up the Uber drivers when they show up at a popular pickup point. In New York, a bonafide yellow taxi straight out of the Joni Mitchell song snagged my Uber call. He had the Uber drivers’ app on his iPhone. “I picked Uber so I wouldn’t have to deal with any of this,” I told him at trip’s end. This argument did not find footing. And by that time, my luggage was already curbed. The battle was lost. I coughed up the fare for the Manhattan-to-Newark airport ride.
Next time I’ll do better. But the lesson for everywhere except New York is that Uber found a way to drive a wedge into transportation to access customers in a way that no one had exploited. If someone is punching you in the face over your marketing plan, you are doing well.
Tiny pie, many pie eaters
In New York, I talked to someone trading a niche oil product. The daily demand for this product is 1/240th what the daily demand is for crude. Sometimes he goes two weeks without making a trade. Right now the problem in his market is that US ports are being flooded with European product. One European producer is paying to store the product off the Gulf in a floating barge and is waiting out a downturn in the market. The US, this trader said, is seen across the Atlantic as a giant maw, always ready to swallow product. The ability to move product across the ocean is keeping the US traders honest and very much on the tips of their toes.
I also heard it’s harder to get jet fuel to JFK because the pipeline from New Jersey has been allocated, and the tight conditions are due to a rise in the number of international flights, particularly to Asia. Singapore Airlines intends to resume a Singapore-New York flight in 2018. In Chicago I learned that it’s a good time to be sending petrochemical feedstocks to Asia and there’s a new type of gasoline about to hit the market for the propeller planes the regional airlines use for short flights.
Back in Houston I heard the crude coming out of the Eagle Ford has enough metal in it to significantly affect its value in the marketplace.
I got in a little break in Vermont during these journeys and got an economics lesson there, too. If you restrict the ability of buyers to get your product, and you have a good product, you will drive people bonkers.
There’s a beer from northern Vermont called Heady Topper. It’s one of those somewhat bitter double IPAs that makes the fruity beer drinkers scrunch up their faces in agony. The brewer, The Alchemist, limits distribution largely to northern Vermont. Certain towns get it on certain days, and it is said to sell out rather quickly. And stores are able to charge 24 cents an ounce for it. (That’s $14.99 for a four-pack of 16-ounce cans.) I appointed myself a Heady Topper distributor and was able to get 10 cans back to Texas. One of my friends would call me a “beer mule.” I could have charged for the beer, but there is no fun in that. I like my beer economy to be like the market for Grateful Dead tickets used to be. I get enough 2015 markets in the 9-to-5.
South American Gothic
And as for that bit about me hating people? Another story. I started reading a book on a Southwest flight about the history of guillotines, headhunting and shrunken heads. You know, like the one from Harry Potter. I relayed a story from that book to the guy next to me. Turns out that a market for shrunken heads developed in Victorian England so hosts could shock the guests at their fancy parties, according to Frances Larson’s Severed: A History of Heads Lost and Found. This led to bold adventurers being dispatched to the South Pacific or the Amazon to get heads. This led to a shortage of heads. This led to the traders in the head market getting their heads lopped off to meet demand.
The guy next to me in the exit row didn’t say much else the rest of the flight.