West Texas Intermediate (WTI) crude oil prices today closed at their highest level since September 1, 2006. It is almost certain that we’ll see some trades at $70 bbl or higher in the next few sessions. But don’t blame Nigeria.
True to form, many analysts and commentators are citing an impending strike that could shut down Nigerian oil production on Wednesday. They are crediting the latest strife as the catalyst behind the recent crude oil price rise.
Trust me on this one. It’s not about Nigeria, where work stoppages are as regular as heat and humidity. If you’ve ever received one of those letters from an out-of-favor Nigerian general who will wire transfer huge funds if you put up some good faith money, you may wonder whether the stoppages are called to hammer out the latest offers to U.S. businessmen.
No, this approach toward $70 bbl crude has everything to do with strong world prices for gasoline, heating oil, and diesel. If you know you can sell the finished product for $25-$35 bbl over the price of crude, there is little risk in buying the crude. I suspect that even oil executives who attend those negotiating skills’ conferences (you know, the ones always advertised in in-flight magazines) might not fuss about $70 bbl crude as long as the finished fuels sell for $85-$100 bbl.
Now & Then Differences
The last time we saw $70 bbl crude in the futures market, the price of gasoline blendstock (RBOB futures) was $1.78 gal, or just shy of $75 bbl. The price of heating oil (NYMEX No.2 oil) was $1.9674 gal, or about $82.60 bbl. One could then see why refiners might balk at paying $70 bbl for a feedstock that might result in products that would only fetch $5-12 bbl more than the raw cost.
If we hit $70 bbl for crude oil this week, it will occur against the backdrop of gasoline futures’ prices of about $2.26 gal or $95 bbl. Heating oil futures closed today at $2.0342 gal, or just above $85.44 bbl. There is little risk in running crude oil if you can sell the finished products for $85-$95 bbl.
These high product prices aren’t just native to North America. European prices for marquee fuels are also in the same lofty neighborhood.
Good bye to $3.00 gal gasoline, but not for long
Okay, so crude oil prices were mired in the low and mid $60’s when gasoline prices crested in May, so where might gasoline numbers head now that $70 bbl crude oil numbers could be in play?
The nationwide average today for unleaded regular stood at $3.005 gal, down 22.2cts gal from the May 24 high, but about 13cts gal above the same day last year. See www.fuelgaugereport.com for details.
This average may or may not slip below $3.00 gal in the next few days. If it does, there will be many misinterpretations of what is at work.
Again, the average price is misleading. This morning, I counted 40 states where one could find gasoline for less than $3.00 gal (and less than $2.75 gal in a few cases) even though only about half the states have average prices below this benchmark.
What we’ll see in the next month will be mostly sideways movement. Wholesale prices fell by 30-60cts gal from mid-May through the first ten days of June, but they bounced back by about 10cts gal late last week.
Absolute numbers may flatten out a bit. California is a case in point. The difference between the “leading edge” prices seen at Costco, Safeway, or unbranded gasoline stations, and the typical major brand numbers has been as wide as 30cts gal of late. We may see the bottom rise modestly while the top gives up some ground as this low price to high price gap narrows throughout the country. In the end, the prices we see during 4th of July celebrations should still be lower than Memorial Day weekend numbers, with the rest of the Summer a storm-dependent crapshoot. The next big predictable move comes in September or October when retail gasoline prices take their annual nosedive.
Odds & Ends
- The fourth largest state in the country - - Florida - - has quietly witnessed the introduction of ethanol into some gasoline blends. Ethanol has been cheaper than gasoline of late (even without tax subsidies) and if some states grant a little relief on ASTM specs, it might grab even more market share.
- This week will mark the Summer solstice but I am worried about heating oil prices between the Winter solstice and vernal equinox. Right now, there are indications that next Winter may bring the highest home heating oil prices on record.
- Has anyone bought any fuel on the water these days? I understand gasoline prices of $3.30-$3.50 gal at marinas, but I have a difficult time when I attempt to comprehend the prices for motor oil. A few weeks ago, I was the designated motor oil buyer for my younger brother’s Grady White fishing boat, and I had to pick up four quarts of two stroke motor oil when we put the vessel into the water. The cost of the motor oil at the marina? $7.30 per quart, or $29.20 gal, or $1226 per barrel. Boone Pickens may have been right when he predicted $100 barrel oil - - he just didn’t specify that he was talking about motor oil, and not crude.