Ukraine’s Drainpipe Drone Will Send Oil Prices Over $100
Like all underdogs in long wars, the Ukrainian army has come up with innovative low-cost solutions to fighting. Forbes wrote a great piece on their drainpipe drones. These are made from found parts and can cost between $5,000 and $10,000.
These long-range Kamikaze drones have a seven-pound explosive coupled with however much fuel they have left in the tank. Essentially, they are flying Molotov cocktails and have been hitting Russian oil refineries. A seven-pound bomb is nothing in modern warfare but when you send in a swarm and hit gas tanks it can create quite a mess.
Drainpipe drones have a 10-foot wingspan and can be launched from the top of an SUV.
President Biden wants to put a stop to this attack on Russian oil and has warned Ukraine not to attack oil infrastructure because global prices are moving higher during an election year.
But that’s not going to happen. The joy of building found part drones is you don’t have to listen to Uncle Sam. Reuters is reporting that 14% of Russian oil capacity is offline and the Russians will have a difficult time repairing it.
Most of the Russian oil complex was rebuilt over the past thirty years using Western goods and services. America’s UOP and Swiss ABB have supplied parts to refineries in the past but they won’t fill any new orders.
Russia claims it can repair all its refineries in two months. This is unlikely.
Oil Supply Shock
In other oil news, Mexico has cut exports by 35% as President Andres Manuel Lopez Obrador makes good on campaign promises to wean the country off of costly fuel imports.
Israel and Iran have stepped up tit-for-tat bombings. The U.S. recently issued a warning that it expects Iran to retaliate after the Israelis killed an Iranian General. Iran produces 3.5 million barrels of oil a day. If escalations continue their oil infrastructure could be hit.
Meanwhile, OPEC continues its production cuts. All of this has led to a supply shock. Bloomberg has reported that global oil inventories are declining.
Companies that do well in this type of situation are refineries like Valero Energy Corp (VLO). I’ve owned this company for about a year now and it is up 22% over the past four weeks, and 42% for the year. Other refiners are Marathon Petroleum (MPC) which is up 74% over the last 52 weeks and Phillips 66 (PSX) which is up 70%.
These companies make money off of the 3-2-1 crack spread. The 3:2:1 crack spread calculation starts with the spot price for two barrels of gasoline, added to the spot price for one barrel of heating oil, and then subtracted the spot price for three barrels of WTI crude oil.
This price which is the industry standard is up about 34% on the year.
Oil refiners and oil stocks in general have some room to run. The second quarter should be great for the refineries but remember they can be volatile. The largest downside risk is that OPEC starts producing more oil or Biden drains the SPR again.
All the best,
Christian DeHaemer
Outsider Club
