Prices for crude oil are above $60/bbl and gasoline prices are rising again. This excerpt from the March 15 issure of This Week in Petroleum expresses a rationale for continued high prices for crude oil and gasoline:
While it is true that crude oil imports over the past four weeks are down slightly compared to the same period last year, this is happening with crude oil prices $5 to $10 per barrel higher than a year ago, and with crude oil inventories nearly 32 million barrels (more than 10 percent) higher, as well. With prices significantly higher and inventory levels the highest in almost seven years, it may be somewhat surprising that import levels are as high as they are. But to many buyers, $60 crude oil can still be
valuable if they expect to be able to sell it later for $65 per barrel, or expect to refine it and sell the refined products for more later in the year. As EIA has written lately, if you expect prices to be higher in the future (due to geopolitical situations in Nigeria, Iran, and other countries; MTBE-to-ethanol transition; ultra-low sulfur diesel fuel; continued strong demand growth; etc.) it can make economic sense to buy now, even if inventories are already high. A deepening contango structure (when prompt prices are less than future deliveries) in crude oil futures markets makes these market expectations transparent and promotes this “buy more now” behavior.
The situation has been somewhat more surprising for gasoline, imports of which have now averaged over 1 million barrels per day for six weeks in a row, the second longest streak ever (the longest streak was a nine-week stretch following Hurricanes Katrina and Rita). Over the most recent four-week period, gasoline imports are over 30 percent greater than those seen during the same period last year, even though gasoline inventories are already above typical levels for this time of year. Some analysts had been expecting gasoline imports to drop significantly, reflecting the recent decline in price differentials between European and United States gasoline markets. But, as is the case with crude oil, many analysts expect gasoline prices to go significantly higher later this year, particularly given the potential for distribution problems related to the transition from MTBE to ethanol in reformulated gasoline (see EIA’s analysis on this issue). In addition, some analysts may expect currently high inventory levels to be drawn down fairly rapidly in the not-too-distant future, if demand remains strong and gasoline production remains low due to refinery maintenance. The bottom line is that if one expects gasoline prices to be significantly higher later this year, then it may make economic sense to buy now, even if that results in adding to what may appear to be already abundant inventory levels.
The Energy Blog: Crude, Gasoline Prices continue to be High