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U.S. Gasoline: High Price Could Continue Despite Low Demand

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By EconMatters, August 26, 2012

 

Crude oil rallied alongside other commodities and the euro to its highest in three months last week on NYMEX, mostly from market's expectation of new Euro Zone bailouts, and a third round of quantitative easing from the U.S. Fed.

 

Crude oil had continued the uptreand after the Energy Dept. reported a decrease of U.S. oil inventory by 5.4 million barrels in the week of last Friday.  Scanning the news, you are likely to see quotes such as "The [EIA inventory] report is relatively supportive," and "Supply concerns persist due to Iran dispute, Syria tension."

 

 

Data Source: EIA, August 23, 2012

 

What Oil Shortage?  


On the crude oil side, although crude stockpile has gone through four consecutive weeks of draw, it is still above the 5-year range (See Chart Below).  Moreover, as we are heading into the slow demand season of the year, inventory most likely will start to build again.

 

Source: U.S. EIA, August 22, 2012

 

 

About That "Tight" Gasoline Market 


Inventories of gasoline (and diesel) in the U.S. are at their lowest levels for this time of year since 2008 (partly due to recent refinery fires and the closing of some refineries in the Northeast).  Gasoline futures have soared 19% over the past two months as traders seem to be betting that prices of gasoline and diesel will continue to rise.  Pump prices typically lag behind the futures market by several weeks.

 

However, America’s demand for fuel dropped to the lowest July level since 1995, plus the summer driving season is nearing an end, which will lead to even lower gasoline demand.

 

Furthermore, domestic refiners have significantly ramped up fuel exports.  For the first seven months of the year, exports were 14% higher than during the same period in 2011, according to API (American Petroleum Institution) data.  What that means is that there are more product supply could be diverted for domestic use.  And even if there's a real shortage for whatever reason, refiners can draw more oil from the abundant stockpile.  

 

Iran Oil Sanctions: Where There's a Will, There's a Way


Regarding the "supply concern" due to Iran oil sanction by the western nations, Saudi has cranked up oil production to multi-decades high ahead of the actual sanction that took effect on July 1.  Reuters also got the latest scoop that Iran oil are still finding plenty of buyers:

Top Asian buyers -- China, India, Japan and South Korea together take more than half of Iran's crude oil exports -- have worked around the European Union embargo, suggesting imports will stay at least around these levels for the rest of the year.

And here's how these energy hungry Asian economies get around the ban by the U.S. and EU:

South Korea joined its Chinese counterparts by asking Iran to deliver crude on Iranian tankers, government and industry sources said. This shifts to Tehran the responsibility for insurance, sidestepping the EU ban.

 

Indian refiners have adopted a twin plan to deal with the insurance issue. They are seeking government approval to ask Tehran to deliver the oil, and are trying to use limited cover from state-run insurers for locally-owned tankers to ship it.

Very Few Compelling Price Drivers

 

Growth in emerging economies in Asia, particularly China, has been the main driver of oil-demand growth in recent years.  However, currently, there's no such compelling story of strong demand and supply shortage that drove oil price to 2008 highs.

 

Near Term Market Movers 


Although the supply and demand factors do not seem to support the current price levels in crude and gasoline, there are plenty of other events to sustain and add the risk/fear/speculation premium.

  • The worse-than-forecast tropical storm Isaac is expected to strengthen to a Category 2 hurricane and hit the Gulf Coast at midweek disrupting refineries and offshore oil production.  Crude and gasoline futures already partly reflected this risk premium.  US gasoline prices could really spike is any of the refineries are off line.  
  • Petroleum Economist cited unnamed sources on Friday that IEA has agreed to a coordinated SPR (Strategic Petroleum Reserves) release with the U.S. in September.  However, during the IEA coordinated SPR release last summer (due to Libyan civil war), oil price managed to climb back to where it was before the release in just eight days. 
  • Federal Reserves Chairman Bernanke's often times market-moving speech at Jackson Hole meeting on Aug. 31. 
  • New bailout and stimulus package development from the Euro Zone and/or China.
  • Geopolitics in the Middle East

EIA estimated that for every $1 per barrel change in oil prices, consumers are expected eventually to see a 2.4-cent-per-gallon change in retail gasoline and diesel prices, if everything else remains the same.  Unfortunately,  these events mentioned above, with the exception the SPR release (the price effect will be temporary), could be enough to keep crude and gasoline at or above current price levels in the near term.

 

Further Reading:

The Spike in Oil Prices on QE3 Expectation Should Be A Warning To The Fed

North America Energy Landscape - A Presentation

 

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Mon, 08/27/2012 - 11:01 | 2740886 FrankThinkTank
FrankThinkTank's picture

Ethanol is an inferior fuel; worse for your engine seals & fuel pumps as it's highly corrosive, more emissions and less mpg. So regardless, it is shit. End of story

Tue, 08/28/2012 - 05:26 | 2742935 New_Meat
New_Meat's picture

and more energy input than output-->requires .gov subsidy to continue.  But that's the reality of the '90s.

- Ned

Mon, 08/27/2012 - 09:30 | 2740673 pragmatic hobo
pragmatic hobo's picture

any idea where the exports are going to? Last I checked gasoline demand is down in europe, china, and east asia?

Mon, 08/27/2012 - 11:30 | 2740946 El Hosel
El Hosel's picture

Retail gas at the pump has not rallied back from the June 21 low  like spot price has, HOW DOES THAT FLY? No doubt we have officials concerned about retail price going into the election, how does "the machine" keep the price at the pump dowm while spot has been on tear since late June?

Mon, 08/27/2012 - 09:07 | 2740609 Quinvarius
Quinvarius's picture

Every time the morons in Washington decide to intervene in the oil markets, they blow up refiners hedges and cost them money.  This loss needs to be passed on one way or another to the consumer.  It doesn't matter how the news plays out around the event or what tricks the refiners play.  If Obama intervenes in the oil markets again, gasoline prices will skyrocket again.  It is basic economics.  The losses Obama causes the refiners becomes part of the production cost.

Mon, 08/27/2012 - 10:53 | 2740869 Rainman
Rainman's picture

Bullish. Gas high means Obama goodbye. I will gladly sacrifice at the pump for a greater good.

Mon, 08/27/2012 - 08:35 | 2740532 orangegeek
orangegeek's picture

Higher prices could continue despite of lower demand - of course it could, but it's not likely.

 

Oil prices, like gasoline, are retracing their previous price drops that started in the spring - wave 2.

 

http://bullandbearmash.com/chart/spot-wti-oil-daily-august-17-2012/

 

Wave 3 down has yet to begin.

Mon, 08/27/2012 - 09:16 | 2740638 SheepDog-One
SheepDog-One's picture

Wave 3 down has yet to begin...and it wont.

Mon, 08/27/2012 - 09:03 | 2740600 Imminent Crucible
Imminent Crucible's picture

"Higher prices could continue despite of lower demand - of course it could, but it's not likely."

Why not? Gasoline prices have continued to climb for the last several years despite steadily falling demand. In fact, retail deliveries are down 40% from 2006 levels--while the national avg gasoline price just hit its highest August price EVER.

It has less to do with the supply/demand mechanics of crude oil and much more to do with supply/demand for Federal Reserve Notes. See FRED data:

http://research.stlouisfed.org/fred2/series/BASENS

http://research.stlouisfed.org/fred2/series/M2

Mon, 08/27/2012 - 07:26 | 2740452 Racer
Racer's picture

Other things such as plently of HFTs messing with the price and not an intention in a multi-gazillion of actually wanting a delivery of a contract

Mon, 08/27/2012 - 05:32 | 2740374 Hedgetard55
Hedgetard55's picture

The "Bernanke premium" on every gallon of gas is about $2.

Mon, 08/27/2012 - 03:15 | 2740271 Kimo
Kimo's picture

Oil prices don't go down, until Goldman wants them to go down...

Mon, 08/27/2012 - 03:55 | 2740300 dexter bland
dexter bland's picture

There's falling demand for oil globally. Likewise for most other commodities  (even gold). That doesn't mean they can't go up in price though. While there's 10 times the volume of  futures trades compared to the physical and a trader can hold contracts on a 5% margin, the actual physical supply/demand fundamentals have little bearing on the price.

 

Mon, 08/27/2012 - 05:10 | 2740359 AldousHuxley
AldousHuxley's picture

oil prices go up when dollar's value go down despite constant demand.

 

 

 

Mon, 08/27/2012 - 02:53 | 2740259 George Orwell
George Orwell's picture

You continue to make the mistake of using US-specific data to forecast oil or gasoline prices. Do you think US crude oil stock have ANY relation to Brent oil prices? And yes, it is Brent crude prices that is relevant here. US demand (or lack thereof) is not the primary driver of Brent crude. It is demand in Brazil, India, and China that sets the price on Brent.

 

Mon, 08/27/2012 - 11:18 | 2740916 LMAOLORI
LMAOLORI's picture

 

Oil goes into a global pool, the oil from the U.S. however does not go into that pool until the U.S. pool is full (not sure if the same is true for other countries but I believe it is) when it does go global it indicates our storage capacity is overflowing.  Thus it can't be demand in Brazil, etc. causing the spike in oil right now. Plus...

Chinese Manufacturing Is Crashing

http://www.forbes.com/sites/gordonchang/2012/08/26/omg-chinas-manufacturing-is-crashing/

Mon, 08/27/2012 - 11:09 | 2740903 Orwell was right
Orwell was right's picture

I agree...(nuff sad)

 

Mon, 08/27/2012 - 08:50 | 2740564 LawsofPhysics
LawsofPhysics's picture

Correct.  Too many U.S.-centric thinking.  U.S. demand is irrelevant at this point.

Mon, 08/27/2012 - 05:06 | 2740353 New_Meat
New_Meat's picture

George: your +/- word for the day.

http://dictionary.reference.com/browse/fungible?s=t

Glad I could help.

- Ned

Mon, 08/27/2012 - 08:53 | 2740575 Winston of Oceania
Winston of Oceania's picture

Due to the varying grades of oil and the resultant differing methods of refining each oil is far LESS fungible than one might imagine. Brent crude is easy to refine unlike Iranian or Venezuelian oil which takes scrubbing with acid among other things to produce less oil per barrel. Oil is priced in dollars period, when they start to print the price will go up plain and simple.

Mon, 08/27/2012 - 09:43 | 2740703 New_Meat
New_Meat's picture

I was +/- teasing ;-)

Mon, 08/27/2012 - 03:14 | 2740270 NidStyles
NidStyles's picture

Uhh, go read that again please. 

Mon, 08/27/2012 - 02:07 | 2740228 keeping appearances
keeping appearances's picture

I had a question about the mandated ethanol requirements in the gas.  Any thoughts besides we ought to stop using our feed stock for fuel....

Mon, 08/27/2012 - 09:23 | 2740645 Quinvarius
Quinvarius's picture

The corn used to make ethanol is still used to feed cattle after the ethanol is extracted.  So your suggestion would not help at all.  It would merely create a giant smog problem.  Don't feel bad.  A lot of people still cling to the anti-ethanol lies because it makes them feel better or they think it will make them money somehow.  But I cannot think of one lie that has not been debunked.  I am sure someone will respond to this with one of the lies.  Maybe they will claim there is some federal subsidy for ethanol production when there is not.  Maybe they will clain it hurts engines, when it actually makes them last longer.  Maybe they will claim what you just claimed even though it is just another lie.  It just makes people feel better.  Ethanol replaced MTBE which drained into out water supply and causes cancer anyway.  It would be horrible idea to lie yourself back into that situation just because you mistakenly believe it will help your corn futures short position. 

Mon, 08/27/2012 - 09:37 | 2740690 LawsofPhysics
LawsofPhysics's picture

"Maybe they will claim there is some federal subsidy for ethanol production when there is not."

The department of energy and NSF (both funded by taxpayers) have several multi-million dollar research programs that fund ethanol production.

This does not even count the SBIR and STTR (Small business inovation research and small business technology transfer research grants) that are also funded by NSF and DOE.

Please explain to us all how this money (tens of millions from the taxpayer) is not a subsidy when the ethanol that is produced goes right to the refineries?

Mon, 08/27/2012 - 10:13 | 2740748 Quinvarius
Quinvarius's picture

There is no federal subsidy to ethanol producers.  The fact that you are trying to use some research money and pretend it is an ethanol production subsidy is quite funny. 

I will give you some trading advice.  Lies don't make you money.  Ethanol makes extra money for farmers because it is a byproduct of what they are already doing.  It takes very little input to generate the extra revenue from an existing product.  It has been around for 100 years and will be around for another 100.  As long as it makes money, it will be around. 

Mon, 08/27/2012 - 10:23 | 2740768 LawsofPhysics
LawsofPhysics's picture

So you are denying that ethanol producers accept SBIR and STTR funding?    Very easy to see who has this funding idiot.  So you are just a troll, thanks for self identifying.  I have worked with Novazyme, Genencor and Cargill.  Go look at their websites, they are very proud of the partnerships they have with DOE and DOD. 

Mon, 08/27/2012 - 10:32 | 2740814 Quinvarius
Quinvarius's picture

Whatever you need to tell yourself to pretend there is a subsidy on ethanol production.  It simply doesn't exist.  There is no federal subsidy for ethanol production.  You obviously couldn't find one.  Your attempts to paint generic globally available research money as an ethanol production subsidy are quite funny.

There is no federal subsidy on ethanol production.

Mon, 08/27/2012 - 10:55 | 2740862 LawsofPhysics
LawsofPhysics's picture

Cargil is an ethanol producer see here;

http://www.ethanolmt.org/plants.html

And look here is a press release describing an ethanol partnership funded by the Department of Energy for Cargil and Dupont among others.

http://energy.gov/articles/doe-selects-five-ethanol-conversion-projects-...

Oh look here's another announcement for more funding to private companies;

http://www.ethanolproducer.com/articles/8980/ethanol-plants-awarded-fund...

Troll harder.

Mon, 08/27/2012 - 10:59 | 2740878 Quinvarius
Quinvarius's picture

That was very old research, not a production subsidy.  Further, it had nothing to do with corn ethanol anyway.  LOL.  It was for cellulosic ethanol.

There is no federal subsidy on ethanol production.

Mon, 08/27/2012 - 11:01 | 2740881 LawsofPhysics
LawsofPhysics's picture

Right including the 2012 funding "active through 2015".  I should know better than to feed the trolls.

Here is a better summary of contracts awarded past 2012 through 2015;

 

http://www.fas.org/sgp/crs/misc/R40110.pdf

 

Mon, 08/27/2012 - 14:15 | 2740890 Quinvarius
Quinvarius's picture

LOL.  That document clearly states that even the small producer ethanol tax credit, that some corn ethanol plants may have been able to get, ended long ago.

No matter what you say, research still isn't an ethanol production subsidy.  Unless you think Purdue University secretly misappropriated research money for cellulosic research and used it for corn ethanol production.  LOL. 

There is no federal subsidy on ethanol production.  We can do this all day and all night. I will win because the thing you are looking for does not exist.  You just desperately want there to be some issue with corn ethanol.  But there isn't one.  Stop repeating things you hear on CNBC.

Mon, 08/27/2012 - 10:32 | 2740811 Everybodys All ...
Everybodys All American's picture

I find it far better to subsidize if they still do ethanol rather than continue the set aside programs for farmers to not produce or crop insurance again to not produce. Let the farmer do what they do best which is produce. As long as there is a market for there product and at a good price I think it would cost the US tax payer less in the long run and it puts US people in jobs. It is my understanding some of the ethanol subsidies have been disgarded by the US government. I think initially having them made sense in order to create the market but I think the ethanol market can now stand on its own. Obviously the drought changes everything this year but that would be the case with or without ethanol.

Mon, 08/27/2012 - 10:58 | 2740876 LawsofPhysics
LawsofPhysics's picture

" I think the ethanol market can now stand on its own. "

I did not junk you and I also think it can, so long as you don't mind it competing with your food.  The nutrients that microorganisms (including algae by the way) need in order to grow and produce etahnol or biodiesel are the same nutrients plants require, period.

Mon, 08/27/2012 - 11:03 | 2740891 Everybodys All ...
Everybodys All American's picture

I agree.

Mon, 08/27/2012 - 06:39 | 2740418 disabledvet
disabledvet's picture

"use the feed stock as your fuel." period. at a buck a gallon it's keeping prices far lower than they otherwise would be. if the gasoline is now being exported the only way to literally keep fuel in the USA is by using farms and farmers. these low interest rates are having "the intended effect" of what the Obama Administration proclaimed as "the solution to all of America's problems" namely exports. Yet this is causing prices to stay way above trend than they otherwise would be. It's also ramping up another "full retard" real estate bubble...and as well leading to a rash of municipal bond defaults of the likes this country has never seen before. basically the term "oblivious" comes to mind when dealing with the public monies...a "burn rate" of extraordinary proportions which will not be cured by "exports." the only solution is internal demand...that means a generalized inflation as happened with the Soviet Union before it collapsed. we'll see how much longer these clowns can keep a lid on the technological solutions that have already been produced. trying to keep the world addicted to gasoline is really retarded way to run the so called "global economy."

Mon, 08/27/2012 - 08:47 | 2740557 LawsofPhysics
LawsofPhysics's picture

Are these the same farmers that are in the middle of a drought, can't afford the fuel and fertillizer for next year, have little to nothing left in their silos to feed their remaining livestock and are looking forward to additional cuts in farm subsidies?

 

Please, enlighten us all on these "technical solutions".  I have some colleagues in North Georgia that make an excellent adult beverage that they can also use as fuel, if this is what you are referring to, the government has already been funding that and it doesn't appear to be working out so well.  Ethanol does not cost under a buck a gallon to produce, even for these moonshiners.

Mon, 08/27/2012 - 03:26 | 2740285 honestann
honestann's picture

Any thoughts other than the rational one?  No.

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