March 30, 2011

Revolution Or Evolution In The World Oil Market? (Guest Post)

By Bob van der Valk

Time has not made much of a difference since 2008...at least in the price of crude.  The price for the U.S. West Texas Intermediate (WTI) crude oil was $107 a barrel on September 28, 2008, vs. around $105 per barrel today. 

On the other hand, the average price at the pump was $2.57 a gallon then, compared with the average is $3.58 per gallon today.  The chart below shows the average price for the period from March 24, 2009 through March 24, 2011):


The reasons for the difference in the pricing of gasoline is exactly the opposite of why they were back on September 28, 2008.  Back then, the US economy went into a tailspin with fuel prices decreasing faster than crude oil prices. They eventually caught up with each other in early 2009 and have been increasing in-sync ever since.

Today's fuel prices are keyed more to the Brent crude oil price posting on the Intercontinental Exchange (ICE) in London instead of the WTI crude oil posting on the New York Mercantile Exchange (NYMEX), which has become somewhat inconsequential since it is landlocked in Cushing, Oklahoma. 

Cushing, OK is the delivery point of NYMEX from where WTI is shipped by pipeline to various U.S. Midwest and Gulf Coast refineries.  In contrast, the Brent crude oil inventories are held at a harbor in Belgium easily reached by any ship able to carry large amounts of crude oil into and out of that location.

The volatility in the price of crude is caused by any world events threatening crude oil supplies as they are the world's main source of energy.  Wall Street bankers and their clients are a big influence in the commodity market and tend to exaggerate prices by making bets for or against the price of crude oil causing speculation in the
oil markets.

Prior to the 1980’s, the price of crude oil was set by the parties involved in actually producing and refining it. That changed when the NYMEX started trading first in crude oil and gasoline, and added natural gas and heating oil later on.

Physical and futures markets were meant to run responding to actual supply and demand, but instead have added a layer of uncertainty for anyone producing fuel in order to keep prices within an affordable range to their consumers.

The Commodity Futures Trading Commission (CFTC) is now proposing limits for energy speculators. Ten big US banks will be affected the most and will have the option to trade on the Intercontinental Exchange (ICE) based in London, which does not have any trading limits.

Now, the Middle East and North African (MENA) revolutions have also been added to the equation making crude oil a commodity speculators dream to come true.  Trouble brewing in MENA and Saudi Arabia will keep both crude oil and fuel prices on an ever increasing path until the unrest settles down.

Iranian Oil Minister Massoud Mirkazemi, who currently holds the OPEC rotating presidency, was quoted as saying:
"There is no need for an OPEC emergency meeting in the current situation as the oil market is well balanced. OPEC is only able to pump about 30 million barrels of oil to the world markets per day, which is nearly a third of the global oil production."
This was reported by the local English language satellite Press TV in Tehran, Iran report on Sunday, March 28, 2010.

OPEC will cut oil shipments to its lowest level since October as civil war halted exports of crude oil from Libya. OPEC oil exports are due to fall to 23 million barrels a day in the four weeks to 9th April, down 1.8 percent from 23.5 million in the period to 12th March.

Oil producers typically respond to strong price signals and are able afford to wait until OPEC’s regular meeting in the middle of June before deciding whether to raise crude oil output. It will be too little too late to prevent higher oil prices.

Crude oil prices are determined on a “futures” market at the NYMEX or ICE. The prices of crude oil traded today determine the future prices at the pump.  Thus, if the speculators see current inventories are sufficient to cover demand until futures contracts are delivered, the downward price happens almost immediately.

A war and revolution in Libya has caused higher prices for gasoline and diesel all the way in the U.S.  The lyrics in John Lennon’s song Revolution are as applicable today as they were back in 1968,
“You say you want a revolution? Well you know, we'd all want to change the world. But if you want money for people with minds that hate, all I can tell you is brother you'll have to wait”
About The Author - Bob van der Valk is an Independent Consultant with over 50 years of experience in the petroleum gasoline and lubricants industry.

The views and opinions expressed herein are the author's own and do not necessarily reflect those of EconMatters.

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