Crude, Gasoline Prices Remain High

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.

Technorati tags: oil, gasoline, energy, technology

The Energy Blog: Crude, Gasoline Prices continue to be High

Comments

[Robert McLeod]

Still no hint from any sources if the balance of crude between sweet and sour is shifting in inventories, accounting for the increase.

[Jim from The Energy Blog]

Robert: Maybe not in this analysis, but I have seen several reports that US refineries are spending a lot of money installing equipment that will allow them to process sour crude. That is part of the overall trend that I believe will be pervasive over the next decade. Use of sour crude instead of the conventional sweet crude is what is preventing the "peak" in oil production from happening. When the idea of peak oil was first proposed it was based on conventional sweet crude. We have passed the peak of this oil. Heavy oil and oilsands oil are now being processed in increasingly greater quantities. Not only does it cost more to produce the crude, it costs more to process it into refined products, thus we are on an ever increasing slope of increasing prices of refined products. I believe we will be on a plateau, rather than a peak, of crude supply in the next decade, that is controlled by the price consumers are willing to pay. We have enormous oil reserves, but the price of the oil will eventually be unimaginable by todays standards. The increasing price will some day reduce the demand and make coal liquefication and biofuels competitive.

[Robert McLeod]

I agree with what you say. What matters not so much is the absolute production of oil but the ability of the rate of production to keep up with the rate of consumption. As long as those two derivatives are equal the price of oil should remain steady. As the demand exceeds the available supply fossil resources it will gradually become more expensive than the alternatives.

Natural gas appears to be a slightly different story because it's not as fungible as oil.

[Cervus]

There was a short article I read in Scientific American a few weeks ago about removing sulfur from sour crude. The first used supercavitation to remove about 50-60% of the sulfur, resulting in about 30% more diesel and gasoline refined from the resulting crude. The second used a chemical process to completly remove the stuff. The sulfur was then used to create a novel battery.

Combined with Enhanced Oil Recovery, Fischer-Tropsh, and other such things, I view Peak Oil as more of a technological problem than anything else. We know far more than we did during the last crisis. And from my reading of this blog as well as other sources, research and investment is accelerating.

[Suver]

Peak oil was about the collapse of western civilization within the next decade. Look at all the bestselling books based on that idea.
Suddenly the peakers are backstepping and redefining peak oil in such a way as to make it unremarkable and impotent. As if.
They're on the record and their credibility can't be rehabilitated.