Brian L. Milne, Refined Fuels Editor, Telvent DTN
A recent government report showed inflationary pressure coming from higher gasoline prices in January, highlighting the impact of last month’s early surge in prices at the pump. Retail gasoline prices fell from early January highs, and inflation is not a near-term threat. In fact, the Consumer Price Index actually fell in January for the first time since 1982 offering consumers slightly more purchasing power for typical household goods.
What the report shows is that despite slow and uneven growth in the US economy that continues to hold down consumer costs, energy prices have other influences impacting their value. And when considering gasoline prices, the impact of activity overseas and expectations of what might happen can and do have major effects on the cost of fuel.
Retail gasoline prices will climb across the country during the final week of February, pushed up by a sharp increase in wholesale costs on tensions over Iran’s nuclear pursuit, with the country now a nuclear state, a strike in France at refineries, and expectations that demand for fuels will increase in the future.
Iran has added geopolitical risk for the oil market for a while, but recent developments in the OPEC nation have highlighted this concern. Namely, Iran said that it has enriched uranium to the 20% level, which is well above the 3.5% enrichment point needed for medical purposes which is what Tehran said was its purpose in pursuing nuclear development.
The contradiction this offers by an increasingly militant Iran raises the stakes that a military strike from Israel is closer at hand, which would disrupt the world oil market, even if only for a short time.
Total, a large French oil company, is contending with a nearly weeklong strike at its refineries across the Atlantic after it announced plans to shut some operations because of poor profit markets. Oil refiners earn money by converting crude oil into various products such as gasoline and diesel fuel.
However, depressed demand for these products has prompted refiners to reduce their production rate. In fact, two refineries in the US have been shut permanently because of terrible margins.
The market sees the strike reducing available gasoline and diesel supply, with Europe a major exporter of product to the U.S., with most of that supply going to ports along the Atlantic.
Meanwhile, the Federal Reserve’s recent rate increase for emergency bank borrowings was viewed as a sign that the economy is righting itself following the Great Recession, as the Fed took the first step in reeling in efforts to stimulate the economy. Oil markets gained on this view.
Wholesale costs for gasoline in the Midwest were also pushed up after falling to multi-month lows earlier in February. New buying emerged in the market to lift costs off these lows, which will now be passed through to retail. East Coast prices are being affected by the strike at total refineries, with the Energy Information Administration noting that historically the East Coast receives 86% of the nation’s fuel imports.
About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent DTN-a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for more than 14 years as an analyst, journalist and editor. He can be reached at [email protected].