Prices At The Pump On The Rise
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The Chicago Tribune – Gas price spike pumping up fears
Potential increase to record highs could slow economy, analysts say
The unseasonably warm weather isn’t the only sign of an early spring. Roiled by the specter of Iranian oil cutoffs, gas prices are rising at a record pace, crossing the $4-a-gallon threshold in some parts of the country, and threatening to break an all-time high, experts say. Fears of $5 per gallon gasoline are in the back of some motorists’ minds, jeopardizing the nascent economic recovery and fueling campaign rhetoric during a presidential election year. “Everybody was worried about Europe as being the precipitating factor to sort of throw the world into a slowdown,” said Tom Kloza, chief oil analyst at Oil Price Information Service. “Higher oil prices could do that too.”
Bloomberg.com – Rising Gas Prices: Not Demand Driven
The national average for gas prices is above $3.50. Yet demand in the U.S. is at its lowest point since 1997. So what’s driving this run-up?
Strangely, the current run-up in prices comes despite sinking demand in the U.S. “Petrol demand is as low as it’s been since April 1997,” says Tom Kloza, chief oil analyst for the Oil Price Information Service. “People are properly puzzled by the fact that we’re using less gas than we have in years, yet we’re paying more.” Kloza believes much of the increase is due to speculative money that’s flowed into gasoline futures contracts since the beginning of the year, mostly from hedge funds and large money managers. “We’ve seen about $11 billion of speculative money come in on the long side of gas futures,” he says. “Each of the last three weeks we’ve seen a record net long position being taken.” Refineries have also been getting squeezed by higher crude prices over the past several months, forcing some of them to shut down rather than operate at a loss, says Stevens. “The price that refineries have been paying for crude was roughly flat, while the price they were getting for gasoline was lower than what they needed to make their crack spread,” he says. A crack spread refers to oil refineries’ profit margins and is roughly the difference between what they pay for crude oil, and what they make by “cracking” crude into petroleum products such as refined gasoline. As the U.S. refining capacity has decreased, prices have begun to rise.
Comment
As the first story and chart above show, the nationwide average of gas prices is on the rise again. Seasonally February typically brings some of the year’s lowest prices. However, the current national average of $3.57/gallon is the highest ever for February. This is why so many are predicting even higher prices this spring/summer.
Last week we noted that the supply of gasoline was plunging, as highlighted in the second story above. The chart below shows the current level is at an 11-year low, yet gas prices are the highest ever for February. Last week we pondered if this, together with the drop in vehicle miles driven, was an economic indicator pointing to a possible slowdown in the economy.
My colleague, Howard Simons, has a different take on this (Subscription only). Either way, gas prices, gasoline supplied (and demand) and miles driven are becoming relevant again.
Source:Bianco Research
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February 23rd, 2012 at 11:54 am
Mainstream Press is clueless.
Bloomberg reports the symptoms of the disease ‘“We’ve seen about $11 billion of speculative money come in on the long side of gas futures…Each of the last three weeks we’ve seen a record net long position being taken.”
Zerohedge (imho correctly) identifies the actual DISEASE: the oil price spike is the “…latest and greatest side effect of massive central bank liquidity tsunamization.”
http://www.zerohedge.com/news/brent-euros-all-time-high
February 23rd, 2012 at 12:12 pm
Has anyone ever overlaid a price of oil chart on top of the price of gas chart above? Would love to see that.
February 23rd, 2012 at 1:06 pm
The good folks in Washington and Oregon will not be helped by this development (this unit is responsible for approximately 20% of transportation fuel supply for the two states):
Feb 23 (Reuters) – The only crude distillation unit (CDU) at BP Plc’s 225,000 barrel-per-day (bpd) Cherry Point, Washington, refinery may remain shut for repairs for as long as six weeks, West Coast refined products trade sources said on Thursday.
A Feb. 17 fire shut the CDU and coking unit at the refinery. All other production units were idled in the hours following the fire because of the CDU shutdown.
A BP representative was not immediately available to discuss refinery operations.
February 23rd, 2012 at 2:05 pm
Will someone PLEASE tell me what they believe the end game is going to be with all this? I mean, how long will we continue to play the cat and mouse game of energy cost spiking, economy slowing down, alternative energy becomes the hot topic, then energy costs come back down again?
My take is that speculative money should be disallowed or limited in crude. There is no greater resource in the world today, and it must be controlled not only in how it’s forumlated, but how it is priced. Price caps? Don’t know about that, but curbs put in to SLOW the trade in it’s futures by those who would never intend to take delivery. No material interest otherwise.
Why not do this in all commodities? Because the whole world doesn’t run on corn, soybean, pork bellies, gold, etc.
February 23rd, 2012 at 2:29 pm
ash- Agreed. Strict limits are needed.
February 23rd, 2012 at 2:59 pm
The major commodity markets have simply turned into a plaything of hedge funds and TBTF traders awash in a sea of free money from the Fed.
With regards to plotting the gas price against oil, it actually needs to be plotted against two oil prices. The oil markets have become unusually disjointed over the past couple of years so that Brent Crude and WTI only have a general connection. They used to be less than 1% apart but now are routinely 20% apart.
I think many of the players are playing the same game as the Saudis. The saudis have explicitly stated that they don’t want oil prices too high because it will force people to more efficient vehicles and into alternative energy which reduces the value of Saudi oil. However, the Wall Street traders do not have a time frame much longer than the next quarter in their heads, so they occasionally game the price up to the stratosphere when they can do it.
February 23rd, 2012 at 3:24 pm
Let OIL run up to $115 and then short it. Realization across the board has began that the Fed’s free money till the eye can see policy is unsustainable. You can see that in the mortgage rates. They have crept up from an all time low value to a bit higher. If the market expected that FED is going to keep money free for another 2 to 3 years, rates would have slumped further.
As this realization becomes a bit broader, speculative money will start taking the other side of the OIL trade and we will be back to $85 or below in a jiffy.
February 23rd, 2012 at 3:56 pm
I would think the green energy proponents are giving high fives to each other.
They can’t wait to kill the economy so they can achieve victory.
February 23rd, 2012 at 4:06 pm
World demand and the ability to export fuel may also have a role.
http://www.usatoday.com/money/industries/energy/story/2011-12-31/united-states-export/52298812/1
The marker for finished and blending fuel products is increasingly global and, contrary to crude oil, those are truly fungible products. If a refiner has the infrastructure to export, pipelines, tanker terminals, etc, and can realize a decent spread once transportation is accounted for, the refiner will export rather than supply the local market. And I believe this capacity to export is a rather new trend in the US.
So it doesn’t matter so much if consumption is down in the US if there is demand somewhere else.
February 23rd, 2012 at 4:57 pm
The saber rattling with Iran gave the speculators a sand box to play in.
The Israelis aren’t too happy with O’Bamas sympathy for the Palestinians (who are they?) and if they can keep the pot boiling and push up energy prices enough to kill this weak recovery and help put a Republican in the WH then they’ll have achieved the first step. The second step will be to have a yahoo Repub president “take out” Iranian nuke facilities for them. Too bad Bush can’t run again. Hey maybe the Repubs could go with Jeb Bush in a brokered convention,Hello $10 gas.
February 24th, 2012 at 1:25 am
@Frwip: agree, good comment. We still import some 55% of our crude AND some 5% of our refined products; but lately, very lately due to a confluence of market factors (reduced demand and spare capacity for refined products) we have been EXPORTING some 10% of our refined products for a NET exported refined products (gasoline, diesel and jet fuels) of 5% or some 1,000,000 barrels/day to Mexico, Brazil and even China. Nothing wrong with this, right Bill O’Reilly who doesn’t understand this and thinks that “we have enough oil here and if we produce more the oil companies would just sell it to China to keep prices high here”. What an idiot!
February 24th, 2012 at 3:16 am
I seem to me that global oilproduction has stayed flat since 05 and that there now is a gap of alt least 1 million barrels pr day between supply and demand. Check this graph from BP: http://media.economist.com/sites/default/files/imagecache/original-size/20110611_WOC898.gif
February 24th, 2012 at 11:42 am
The United States bans futures trading in onions (onions!!!) so that speculation doesn’t get in the way of basic supply & demand pricing … but we can’t do the same for petroleum and its products?
http://en.wikipedia.org/wiki/Onion_Futures_Act
March 18th, 2012 at 4:21 pm
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