Wholesale gasoline costs across the United States were shallowly mixed through the third week of March with several exceptions, notably in the Midwest, as the broader oil market wrestles with both lost supply and demand globally. A resolution to the current uncertainty is not expected in the near-term, which will keep the markets on edge for some time. Amid this worry, oil prices will remain elevated, with crude again holding above $100 barrel, as civil war in Libya likely keeps offline oil production from this member of the Organization of the Petroleum Exporting Countries until at least 2012.
Historic global events continue to unfold that are having a huge impact on the oil market. In addition to lost supply from Libya, which accounts for roughly 2% of the world’s oil supply, there are increasing tensions throughout the Middle East. The spread of antigovernment protests following regime changes in Egypt and Tunisia in North Africa have engulfed much of the Middle East. In Yemen, which has a border with Saudi Arabia, government forces have fired and killed scores of antigovernment protesters while protests in Bahrain that have killed six are potentially more problematic for the oil supply chain.
Bahrain is a small island nation located between Saudi Arabia and Iran. Bahrain has a Sunni monarchy, although its population is primarily Shiite. Protests led by the Shiite majority sparked the Bahraini monarchy to seek assistance from Saudi Arabia, among other Gulf nations, which sent 1,000 troops. Saudi Arabia also has a Sunni monarchy. The troop deployment triggered criticism from Iran, which is primarily Shiite. Harsh words have been exchanged between the two OPEC nations, and analysts fear an escalation beyond the proxy battle being played out through Bahrain.
Likely holding US crude prices below $110 barrel in the near-term is lost demand from Japan. The third world’s largest economy is also the third largest oil importer amid its heavy manufacturing. The 9.0 magnitude earthquake that triggered a massive tsunami took a direct hit on some of this manufacturing concentrated in northeast Japan. More of a worry is the ensuing nuclear disaster including rising levels of radiation.
The devastation will prompt rebuilding in the months ahead that will drive global demand for oil and gas higher as the country ramps up imports. In the near-term, Japan is also seen importing diesel fuel to help generate electricity. How quickly this ramp up occurs is unclear, while lost manufacturing and the sheer carnage in the northeastern part of this proud country reduces oil demand.
Analysts are also debating what this might mean for the global economy, which remains in a fragile state. Slow growth limits energy demand. Despite this possibility, oil and gasoline prices will move higher in the coming months.
In the Midwest, wholesale gasoline prices got an added boost with the transition to summer grade gasoline with a lower Reid Vapor Pressure rating, which is more costly to produce. This helped to push wholesale costs up 9 cents or more in Chicago, and from roughly 6cts to 7cts higher in surrounding cities in Cleveland, Detroit and Indianapolis.
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].