Publications: Notes at the Margin

A Lesson from Excess Returns to Storage: Foreseeing Crack Fluctuations; The Energy Transition: It Will Be Quick (May 10, 2021)


This publication has carefully published excess returns to storage for Dated Brent, low-sulfur distillate fuel oil, gasoil, natural gas, refinery blendstock for oxygenated blending (RBOB), and WTI for more than thirty-six years. Every week, we marshal the data, run the program, check the numbers, and report the results. Friends have asked more than once, “Why do you do this? There is no information in the data.”


The gasoline market’s competitiveness suggests that the spread between gasoline and crude prices will be relatively free of OPEC’s manipulative efforts. This condition implies, then, that excess returns to storage, the data we have diligently developed over more than three decades, might be useful as a predictor of gasoline cracks or distillate cracks. Such a finding would confirm the assertions of financial theorists who believe that most market information is embedded in prices. The problem is that information is often hidden. In the first section of this report, we test the usefulness of excess returns to storage as predictors of future gasoline cracks. The initial test reveals that these returns have predictive power.


The second section of our report joins the debate regarding the world’s transition from a planet dependent on fossil fuels to one in which renewables dominate has suddenly emerged from the confines of turgid academia to front and center. The increased attention is not an accident.


Worries regarding human survival rise with each stunning, painful, and deadly environmental catastrophe. The February economic disaster inflicted on Texas by a polar vortex—which by historical standards should occur once in a hundred years but seems likely to become an annual event—only intensifies concerns.


Interest in the speed at which consumers and nations can reduce harmful global warming gas emissions escalates with each climate disruption. Discussions of how fast the world will shift from its reliance on fossil fuels to fuels and power sources that help reduce greenhouse gas emissions to net zero also rises with each event. The phrase “energy transition” is now widely used.


Reviewing the debate, one finds two schools of thought. One group believes fossil fuel consumption will linger for years. Some of its members even assert that oil and natural gas use will increase for two decades or more. Those who ascribe to the second school of thought believe fossil fuel use must and will fall quickly, with some of its members seeing consumption dropping by twenty or thirty percent by 2030.


As we discuss in detail, some past events support the rapid decline view.


To receive the full report along with futures issues of Notes at the Margin, please Contact Us or send us aInformation Request for subscription information.