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Gasoline: No Cure For High Prices Like High Prices
By Dian L. Chu
Crude oil market has been on a wild roller coaster ride ever since riots started escalating in Egypt and Libya. The latest Libyan supply disruptions sent WTI futures surging above $103 a barrel in New York on Thursday, Feb. 24, while Brent oil in Europe was also closing in on $120 a barrel.
However, both oil markers retreated mostly due to traders scrambling to reposition when NYMEX and ICE boosted margin requirements on oil futures as crude traded above $100 a barrel.
Furthermore, the news that Saudi officials are in talks to supply refineries with oil from spare capacity to bridge the gap caused by Libya also seemed to have calmed market fears…at least a little. Oil prices nevertheless finished the week spiking 13% to 2 ½-year high.
Gasoline Jumped 6 Cents in One Day
Crude oil makes up about 67% of the gasoline price, based on the latest assessment by the U.S. Energy Dept. So, it is of no surprise that the national average price of unleaded regular gasoline jumped nearly 6 cents in one day to $3.29 a gallon from Thursday to Friday, Feb. 25. That was the biggest one-day jump in two years, according to the AAA.
The latest data from the U.S. Energy Dept. also showed the average retail gasoline price marked its largest weekly increase of 2011, jumping 1.6% to $3.19 per gallon the week ending Feb. 18. That’s 20% higher than last year at this time (See Chart). Diesel also has rising for the past 12 weeks now averaging $3.57 per gallon.
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| Chart Source: U.S. EIA |
Some analysts started talking about $4 or even $5 a gallon gasoline at pump could be right around the corner. Many are worried about the potential impact high oil and gasoline prices could bring to the still fragile U.S. as well as world economy.
Europe’s Libyan Panic
As a large share of the oil trading in Europe comes from the Middle East, Brent has rallied in response to the increasing geopolitical tensions in that region, plus Brent is actually undersupplied due to regional and seasonal factors.
Furthermore, Libya’s crude is considered an alternative to light and sweet grades such as Brent, which is popular among European refiners for diesel production. The International Energy Agency (IEA) estimated that the Libyan unrest has curtailed up to 47%, or 750,000 barrels a day (bpd) of Libya’s total oil production, and that before the crisis Libya produced about 1.6 million bpd, or 1.4% of global oil output.
So, the almost 50% production halt at Libya, although not a significant threat from a global supply point of view, is squeezing European oil companies to find substitute for the equivalent grade from other nearby regions like Algeria, Nigeria, which could further bid up the Brent benchmark.
U.S. Hit With A Double Premium
As pointed out in my previous post, the U.S. petroleum product prices are trending with Brent oil in Europe, instead of the WTI in the U.S., which is trading at a steep discount to Brent mainly due to WTI losing its relevance with a logistic land-locked high storage at Cushing, Oklahoma (See Chart).
So, on top of the geopolitical premium, prices of gasoline and distillates in the U.S. are getting hit with an additional WTI-Brent spread premium since Brent is trading at around $14 more than the U.S. WTI crude.
Ample Stocks in the U.S.
The problem is that by following Brent’s movement, U.S. gasoline and distillate prices are basically reacting to market fundamentals in Europe--ignoring the ones at home.
While European refiners are scrambling to find alternatives to their preferred Libyan crude, crude oil, along with petroleum products are well supplied with plenty of stocks in the United States (See Charts). In fact, stocks of gasoline is just 2.8 million barrels off the 20-year high reached in the week ending Feb. 11.
Fear Knows No Boundaries
Crude oil is probably one of the largest, most liquid and speculated commodities in the world. As such, there are lots of components, physical (supply and demand) as well as psychological that go in to the price of oil as well as gasoline.
The supply anxiety associated with the uprising in Egypt, Libya, and possible contagion in the world's major oil producing region has kept the energy market, European Brent in particular, on edge.
As long as the situation in the Middle East and North Africa remains volatile and unresolved, markets will keep adding fear premium to crude oil and associated products. And fear has no boundaries even though there’s no clear present danger of an actual physical supply shortage.
No Cure For High Prices Like High Prices
In the U.S. however, even though gasoline and heating oil prices are chasing Brent, it does not change the fact that there’s a product glut in the U.S. with a flat demand outlook. So, unless there’s a whole lot of surprise hidden new demand to support current price levels, prices will have to come down.
Otherwise, prolonged high oil and product prices will most likely lead to consumer behavior change -- driving and spending less—which could bring about a demand destruction, and another recession to boot, forcing an oil market [crash] correction to reach equilibrium.
Market Correction in March
The futures curve pretty much tells a similar story. According to the CME Feb. 27 data, RBOB April 2011 futures contract stood at $2.9086, but it drops to $2.8704 for April 2012, $2.8078 in 2013, and only $2.6744 in 2014.
So, based on the discussion here, I’d expect a market correction at the next contract rollover around March 8. Technical indications suggest WTI crude could easily correct to the $90 levels, heating oil to the $2.60 levels, and RBOB to the $2.50 levels. From a trading and investor’s point of view, the size of the correction would be worthwhile to go in short the April crude, RBOB and heating oil.
Fed’s QE2, a weak dollar, recent upbeat economic data and a cold winter season has provided support to crude product prices. However, as winter ends, QE2 expires in June with QE3 an unlikely scenario, and China cools off its economy to fight inflation, gasoline and distillates probably have already seen their highs for the year already.
Related Reading: Crude Oil: Egypt Contagion and a Tale of Two Risk Premiums
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That's depressing. It means Khaddafi will win as he is in bed with BP/SHELL/ENI and the rest of the oil lobby, world oligarchy NWO brigade, of which he is the role model.
One day, the western world will all be run by the likes of Khaddafi. We'll go and visit national treasures in their palaces, a la Versailles, and be happy to have such geniuses looking after the future of our children and sharing our wives with his minions who sell regal 'indulgences' on the side. All will be hunky dory in the world state of centrally planned oligarchic rule, where the Neo-liberal, globalised, market model will automatically decide, through it's super duper multi criteria algorithm, which bunch of 'sheeple' get the next subcontracted, outsourced, mega contract for 1$/hour of sweat and toil. Where the mantra is : we are not racists, we are not against any people, any creed, any ball game. We only want you to drive any car you like, provided its black and comes off our production line where ever it's been temporarily located for the general good of humanity...
Brave new world.
the cure for high prices is high prices lol
cost of a nice mans suit 1200.00 well kinda nice
in a year same suit should sell for 800.00
to fit the program laid out for gas
and a gallon of gas now 3,60 should soon see the 1.00 price , that would really be a cure all lol
High oil prices will mean Exxon's profits will double. Again
We have a military, perhaps we may want to use it.
Maybe you don't realise it but as the Washington historian William Blum has documented, since 1945, the US has destroyed or subverted more than 50 governments, many of them democracies, and used mass murderers like Suharto, Mobutu, and Pinochet to dominate by proxy. In the Middle East, every dictatorship and pseudo-monarchy has been sustained by America. In "Operation Cyclone," the CIA and MI6 secretly fostered and bank-rolled Islamic extremism. The object was to smash or deter nationalism and democracy.
Hey, don't you think you might have done enough already?
what do you think we have been doing in iraq and afganistan for the last ten years?
its called QE Perpetual, it grows faster than the rates of the illegals flying through our immaginary borders.
Why is QE3 unlikely?
pressure, social and political, is building on the central banking crones... they've already had unheard of criticism from all quarters, even the usually compliant Press, and it's now reaching the point of total ridicule (have you seen Banzais latest?)
The Fed is a central bank dependent on Congress for its mandate. Bwankers are first and foremost survivalists so as this pressure builds there will be an 'accommodative' policy change
Funny, I guess I forgot winter was peak season for gasoline demand. And of course the state & federal budgets are balanced so no need for fed to monetize any more debt (aka QE). Middle east military leaders are really closet democrats so nothing to fear there. Guess I should get back into cash and start piling on the USO shorts.
Paid $3.89 9/10 at the Chevron in downtown Kirkland, WA this afternoon, came to $91 and change.
Buy gold....Banks do
Peak oil nuts are...nuts. If dead people can keep voting for Dims in IL, it must mean they are also generating oil through their perpetual decomposition. Crises solved!
I propose IL be declared a National treasure, in that the dead there constantly dissolve!
The most important factor regarding the brent pricing mechanism has nothing to do with gasoline demand in the US--it has everything to do with the Diesel usage/demand abroad. Around 70-80% of all motor systems abroad are diesel fueled. Gasoline and diesel go hand in hand during refining as you cannot get diesel without refining for gas--average oil barrel refines to what 20gallons gas and maybe 9 gallons diesel but with different refining techniques you can increase that to probably 20 gal diesel/9 gal gas. Brent is not going down anytime soon.
For instance, Beijing cut electricity grid supplies from September 2010 to meet energy efficiency targets at the end of the 2005-10 five-year plan, causing a jump in the use of diesel-fired generators, just as in 2004. This has helped take crude prices above $80/bl from October as Chinese refiners boost runs to make diesel. How about those apples lighting Beijing with generators-get a clue asia.
We can always default on our debt; oh, the Fed owns it all.
Can't we just start derivatives on Banksters' organs?
Any takers for CBSs on Schumer' brain? (Disclosure: not proven he has one)
And, yes, he's a Bankster, ya lowlife.
Definitely a source of jizzoline...
Betting on a reversal in March is like buying TZA. So long, sukker!
Demand is down, no money to rent movies from the redbox at mcdaddy's, the proles don't need gas to get to a job they don't have, like I told the unemployment lady back in the day "you want me to spend $14 in fuel to come to your office so you will give me a $24 check - hey, just send me $10 and we'll call it even."
Paid $3.59 for premium today in the lady's car - mine will need gas tomorrow. Shit.
Not even, not even.
You did not consume gas if you did not go. In other words, you conserved and you lost. Because conserving is counter production in a consumption game.
Nicely done. That whole supply and demand thing is a bitch isn't it. Sooner or later, someone either wants the product, or no one does;)
Thanks for your insights. I have played the OIL trade from both sides over the past 10 days. I went long again on the Friday dip and closed out the trade tonight as price hesitated at just under $100. The rationale for the trade was that no one in their right mind would want to be out or short into the weekend given the political tensions and social unrest.
If OIL breaks decisively and holds above $100 there is no good news for the FED.
Also, I am inclined to agree with you about the possibility of a pullback but my 1st target for a short is about $95.
I think that the ME tensions may keep a floor under the price for an extended period of time.
Flat for the moment........looking to tomorrow's Pit trading session for a better sense of direction.
Your articles are always worth the read.
I hope oil goes down.
It will take away some of the inflationary pressure and buy us a little more time.
When the inflationary pressure goes away the deflationary will just rear its ugle head again. Defaults bitchez!
Saturday - Oil change, new wiper blades, & car wash = $78.00...tank of gas (premium) in the car = $55.00...... later in the day, filled up my pick-up truck = $93.00 (28 gallons of regular).
Most of America lives paycheck to paycheck. Most families have 2 wage earners driving 2 automobiles. That extra $10-20.00 each week will be felt quickly by many. We have been here before, and not long ago. Last time, it kicked the legs right out from under the economy. Retail sales in general plunged. The malls and better restuarants are just now recovering.
The cure for high-priced oil may be high-priced oil, but it is an expensive cure.
If people didn't have the see it/want it/buy it illness and you got rid of half the waste in Govt. lowering the tax burden by 25% wouldn't need two people in one family working to make ends meet. Guess what? Unemployment problem solved.
.....oh, and of course, let's not mention that Ghawar has peaked....
If Saudi oil couldn't pick up oil production at the $140+ price level....what makes us think they can do it now? Seems like another well placed rumor....somewhat akin to the Muamar being killed rumor....same end goal....lower oil prices.
Yeah there are riots in how many countries right now but oil is going to drop just as Ben satrts printing another trillion - get real
INvestors are scrambling to oil mostly becuase of the crumbling dollar with more loss of purchasing power every day. Oil (and gold) are good stores of wealth. Even Blackrock bought 8 million shares of GLD recently, not to mention numerous pension funds loadin gup on the "silly yellow metal."
Oil provides double protection...against dollar collapse and long term loss of oil, the "Milk of the Military" as Rumsfield called it.
Bernanke might push to tap strategic reserves to keep price down so he can make QE3 a doozy.
I’d expect a market correction at the next contract rollover around March 8. Technical indications suggest WTI crude could easily correct
dian the TA person of interest
so you are A whizz at TA give us a prediction on the Dow .. or does it only work in oil , gold and navel lint
Is that TA or T 'n A?
(Hey I'm starting to get the hang of hanging on ZH)
hey dian, I think you forgot all the gas and oil the armies of the world will use to quell us troglodytes. Big demand there...
Tanks get like ahh, 1/2 mile per gallon. All that jet fuel to bring em home. Armored
Hum Vees what do they get, 5 mi. per gallon? Sucking it down. They will have to drop a couple of nukes to finish the job in Afga..stan before rushing home. Oh well they wont have to pay the vig. on fuel here like over there. I guess it will be cheaper just to corner and lock up everyone here. Great solution!! Why didn't I think of it sooner?
The Fed will, the Fed wont. Fickle, just like a gal I used to know.
QE3 an unlikely scenario
you jest
says who,,, with out it interest rates rise ,, home prices fall even more . market plunges , obermer swept out in a land slide.
almost every thing we see is a prescription for more fed monkey business,
states are falling into the hole. all banks are bankrupt with their diswtortion of Gap rules on pricing of real estate.
AIG setting on good old crap bonds ,,
inflation is printing money,, as prices scream higher in other lands oil will be priced so as to return the same as 80 clucks a barrel sans 15% inflation factor back to 95..
since you did not get the memo // signeled vby the republican leaders ship.. We will not shut downba govwernment gone amuck nor will we cut expenses.. but will kick the can further
"QE 3 unlikely scenario" - oh please! QE is here to stay. We'll see $4 gas within 90 days IMHO (assuming unrest doesn't hit Saudi Arabia, if it does... the sky is the limit on oil). $3.59 when I filled up today (NW).
In Europe it's already $8/9 gallon. I'm looking at figures that show passenger car fuel economy and the US is way behind China & Japan which are a little behind Europe. Maybe instead of rhetoric you has used the last 40 years to get to the same efficiency as Europe it wouldn't be as hard for you.
European auto 'fuel efficiency' has more to do with not having to comply with U.S. emmissions, crash testing, and assorted other government regulatory mandates imposed on american industry. Does Europe also have the brilliantly moronic 'ethanol' mandate for fuel? Probably not.
I've already noticed a 2-3 MPG drop in my wife's Toyota Celica average mileage since the introduction of '10% ethanol blend'.
Also, given that european fuel economy ratings are better, why do europeans pay so much MORE for fuel? Shouldn't less demand = lower prices? So yeah, I'm not impressed by the euro model in this regard either. :-)
QE3 will quickly result in $5-6 gasoline, given the anti-oil bias of our criminal regime. US prices don't stop at the border.
And when we get a different criminal regime with a pro-oil bias, prices will "somehow" continue to rise because they're all friends.
Nathan
we must have filled at the same station lol
Gas is 3.89 for unleaded in Arcata Ca. It was about 3.30 4 months ago. I watched it climb about 20 cents alone in the last couple weeks.
The rest of the US pays 3.40, there is your CA premium for living in a FUKKING STATE THAT IS RETARDED!
350 M barrels in stock divided by 20 M barrels per day consumption equals 18 days.
It's comforting to see that oil has 9 times as much cushion as food in grocery stores.
Interesting - how we still apply fundamentals to this market. There ARE no fundamentals. BTFD.
High oil Prices = Lower Productivity = Higher Unemployment = Lower Stocks = .. Yee Haw! QE3!...
What more excuse does the Fed need than high unemployment and a dropping stock market for more stim?
The FED may even WANT high oil prices - to keep the justification for flowing money into Wall Street...
Supermarkets could get wiped out in just a few hours!
Who needs food, I'll live on my gold nuggets. :)