By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Gasoline price watchers should expect prices at the pump to again nudge higher in closing out January, pushed up by a surge in oil valuations in wholesale trading on Jan. 28 sparked by unrest in Egypt. The rally reversed what would have been a decline in wholesale gasoline prices for the final full week of January.
Wholesale gasoline prices increased in metropolitan markets across the United States amid worry over the ongoing uprising in Egypt. Protesters are determined to unseat longstanding ruler Hosni Mubarak, taking to the streets following the fall of Tunisia’s president earlier in January. Street demonstrations on Jan. 28 triggered rallies in crude oil, gold and the US dollar as investors fled equities, looking for safe haven assets. Oil was also boosted by an increase in its geopolitical risk premium on fear of a potential closure of the Suez Canal and the possible spread of uprising in other Mideast nations. There have already been riots in Yemen and Lebanon.
Egypt does produce oil, but has a smaller reserve than some of its Arabian neighbors, while needing to import oil to satisfy domestic demand in the roughly 82-million people nation. However, Egypt controls the Suez Canal, a key waterway in shipping Mideast crude oil to Western Europe. The canal can only handle smaller oil vessels carrying one million barrels of oil or less.
As such, Mideast crude destined to the U.S. typically sails on larger crude carriers that make the trip around Africa. A shutdown of the canal could add as much as a month delay in oil shipments from the Mideast to Western Europe. That would further push up Brent crude oil prices, which is the European benchmark crude, which traded within a hair of the psychological $100 barrel.
West Texas Intermediate crude is the U.S. crude benchmark, which has traded at more than a $10 per barrel discount to its Brent counterpart. Typically the two crude oils trade within a $2 barrel range with one another.
The wide spread, referred to as an arbitrage, widened due to tight supply in Europe due to lost North Sea production and an ongoing cold winter that has spurred high demand for fuel. In the U.S., crude inventory levels have been building on lower demand for gasoline and a steady stream of supply coming from Canada, exacerbated by oil sands output.
The US oil market was under downside price pressure ahead of the revolt in Egypt on growing oil inventory levels while gasoline demand is usually at its weakest this time of year. The markets were also deemed overbought, a technical condition meaning the price run-up was largely exhausted.
The Energy Information Administration (EIA) indicated the US average for regular grade gasoline increased to $3.11 gallon, a fresh 27-month high, as of Jan. 24. It was the ninth consecutive weekly increase in the retail average. Higher wholesale costs imply a tenth straight increase in the average is waiting in the wings.
In 2010, the US average posted its low of the year on Feb. 15 at $2.608 gallon. The average was up 18 cents by March 15 and 25 cents higher by the middle of April, when prices started climbing in anticipation of higher driving demand for the summer months. This history augurs for high gasoline prices at US pumps to be maintained in the near term.
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 15 years as an analyst, journalist and editor. He can be reached at [email protected]