By Brian L. Milne, Refined Fuels Editor, Telvent DTN
For some, the unpleasant reality of $4 gallon gasoline has already occurred, namely in California, where the Energy Information Administration reported in early April an average price for regular grade gasoline at $4.057 gallon.
As of April 4, the EIA pegged the average for Chicago at $3.933 gallon, but since then, wholesale prices for the Windy City market have jumped 11.65 cents, promising a move over the $4 gallon threshold before tax day.
View Telvent DTN’s Weekly and Historical Gasoline Price Index.
Oil trading in financial markets spiked Friday (4/8) after forces loyal to Libyan leader Muammar Gaddafi set ablaze the 500,000-bpd Sarir oilfield in eastern Libya which is under rebel control. Rebels had successfully loaded their first crude cargo earlier in the week, seen using the proceeds from the 1.0 million bbl shipment to aid their cause.
In response, pro-Gaddafi forces have attacked Libyan oil infrastructure held by rebels in the east, raising market fear that oil from this North African nation and member of the Organization of the Petroleum Exporting Countries could be lost to the world market for many months.
On the news, New York Mercantile Exchange crude oil futures nearest to delivery spiked above $113 barrel, the highest it has traded since September 2008, while the European crude benchmark, Brent crude futures traded on the IntercontinentalExchange platform, have traded at $127 per barrel.
The market gauges global spare oil capacity when making pricing decisions, with recent events since narrowing this supply cushion from 6.0 million barrels per day at the start of the year to estimates near 3.3 million barrels per day. The smaller supply cushion triggers a higher price for oil.
Many critics of high oil prices, who note that global inventory coffers, especially in the United States, are at a surplus compared with the historical average, believe the market has overreacted to events in Libya. They are countered by a market opinion that events in the Middle East and in Africa, where most of the global oil reserves are found, will not be settled in the short term. Moreover, worst case scenarios, such as a war between OPEC members Saudi Arabia and Iran aren’t even priced into the market they say.
This is clearly speculation, but that is and has always been a primary feature of the futures market. It’s not just balancing supply and demand, but also factoring in events that adjust this balance. This is why futures traders are said to “climb a wall of worry.”
The risk to supply by civil upheaval in the Middle East and Africa has already been demonstrated in Libya; and further supply vulnerability is definitely a possibility for the region. Additionally, no one is certain on the eventual outcome from the current events in the region, and how that might impact oil prices in years to come. There are some suggestions that the resulting governments will look to claim more revenue from each barrel of crude they produce to support a yet to be determined social agenda. Already, we have seen Saudi Arabia commit to spending billions of dollars on social issues in what some have described as an effort to placate political unrest in the kingdom.
On the other side of the spectrum is the impact of high fuel prices.
Historically, high fuel prices in free economies have had an impact on demand. This feature could be on display now, with fuel demand still up this year against 2010, but the growth rate has eased from earlier in the year, coinciding with the sharp price increases.
EIA shows implied gasoline demand, which is gasoline supplied to market, improving in 2010 versus 2009 for eight of the final nine months last year. The year-on-year demand growth slowed in January into early February following heavy snowstorms, but was again ratcheting up in late February into mid-March, with four-week average demand through the period ending March 5 up 2.3% against the comparable year prior period. Through the four weeks ending April 2, the most recent data available, year-on-year implied gasoline demand is down 1.2%.
Early Monday, the International Monetary Fund maintained a 4.4% expansion in the global economy for this year and a 4.5% increase in 2012. However, the IMF said high oil prices are a key downside risk to this assessment. In other words, high oil prices have the potential to dent the global economic expansion that, in turn, would dampen oil demand.
While lower demand would curb the surge in gasoline prices, it’s unlikely that prices would collapse. So, we could see the current inflation in gasoline prices persist, with high prices in the coming months despite lower demand.
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]