Headlines
June 6, 2008
Senate Panel Told 25%-33% of Oil Price Rise Due to Speculation
Is crude oil's near doubling in price since last year due entirely to
speculation by
non-commercial interests?
Participants in a Senate hearing called together Tuesday to discuss high
petroleum prices and their possible link to energy market speculation put that
figure somewhere between 25% and 33% though some offered more nuanced
explanations.
International financier and philanthropist George Soros, claiming to know
more about market bubbles than the oil market, told the panel that three oil
market realities had created an upward trend in prices and trend-following
speculators and institutional investors in commodity index funds had done the
rest.
"The bubble is superimposed on an upward trend in oil prices that has a
strong foundation in reality," Soros told the Senate Committee on Commerce,
Science and Transportation.
The trio of realities includes the high cost of developing new oil reserves
in concert with depleting reserves, fuel subsidies in countries with the
highest oil demand growth, and a backward-sloping supply curve that means as
the oil price rises producers have less incentive to convert reserves
underground (expected to appreciate) to reserves above ground (which are losing
value).
Financial institutions participating in energy markets indirectly provided
capital to oil producers initially, but the field became crowded and the profit
disappeared. Then came the financial woes triggered by the housing bubble and
the subprime loan debacle and the Federal Reserve's
solution of interest-rate
slashing, all of which weakened the appeal of all asset classes
except for commodities.
Unfortunately for the motorists, airlines and truckers all hurting from
oil's leap to the stratosphere, the oil market is unlikely to crash back to
earth. "The danger currently is in the opposite direction," Soros said.
"Only when a recession is well and truly in place is a declining consumption
in the developed world likely to outweigh the other factors," he added.
University of Maryland law professor Michael Greenberger joined Committee
Chair Maria Cantwell (D-Wash.) in a scathing rebuke of the Commodity Futures
Trading Commission and its plans for greater oversight of energy markets.
The agency's recent announcement that it would get more information about
activity in U.S. crude futures traded on exchanges overseen by boards of trade
in London and Dubai was "an abdication of its responsibility" and "an outrage,"
according to Greenberger, a former director of trading and markets at the CFTC.
The purported closure of the so-called Enron loophole in recent
legislation "is the biggest joke in the world because it was written by the
exchange that needs to be regulated - it puts 1,000 burdens on the CFTC and the
public to prove that there needs to be regulation," he said.
If the CFTC was made to regulate trade of U.S. crude futures on the London
and Dubai
exchanges, news of the move alone would bring down the price of crude
oil by 25% overnight, Greenberger said.
Cantwell, in her opening remarks, vowed to introduce legislation forcing the
CFTC to fully regulate all energy trading of U.S. energy commodities if it
didn't go further than what was proposed last week. She wants limits on large
speculators and full collection of trader information from foreign boards of
trade and an enforcement mechanism for that collection.
Mark Cooper, of the Consumer Federation of America, put speculation's
contribution to the current $125-$130/bbl price of oil at about $40.
"OPEC is only defending $80 a barrel," Cooper said. "So the most recent $40
is coming from someplace else ... the oil companies have testified to something
in the neighborhood of $40 per barrel for economic costs," he said.
Soros disagreed with the panel's overemphasis on the "froth" on top of
serious underlying factors for the price of oil. The price rise is wreaking
havoc in world economies but it's made worse by the "very real problem of
global warming" and the pollution that comes from the cheapest and most
abundant source of energy - coal.
"That is a problem that is confronting us, and we have not dealt with it.
And that, I think, in my mind, overshadows everything else," he said.
June 3, 2008
Storms Forecasters Predict Major Hurricane on U.S. Soil
Crude oil prices are on the decline for now, but if hurricane forecasts for
the summer pan out,
calls for $150/bbl crude oil could shift from a prediction
to a reality.
The Colorado State University Hurricane Forecast Team today upheld April
forecasts for 15
named storms, including eight hurricanes to form in the
Atlantic basin this summer. Four of
those could become intense hurricanes with
a category rating of 3-5, with sustained winds
of
111 mph or greater.
"Conditions in the tropical Atlantic look quite favorable for an active
hurricane season. Sea surface temperatures are anomalously warm, while sea
level pressures and levels of vertical wind shear are quite low," said Phil
Klotzbach, the lead author of the forecast.
"Our primary concern is the warming waters in the equatorial Pacific," he
added. "At this point, we do not believe that an El Nino will develop by late
this summer; however, this is a possibility that must be monitored closely."
The team predicts that there is a 69% chance that at least one major
hurricane will make landfall on the U.S. coastline this summer.
Computer models show there is a 45% chance a major hurricane will make
landfall on the East Coast, including the Florida Peninsula, and a 44% chance a
major hurricane will make landfall on the Gulf Coast from the Florida Panhandle
west to Brownsville, it says.
The forecasters also see an above-average major hurricane landfall risk in
the Caribbean.
Tropical Storm Arthur, which formed on May 31, is the first of the 15
storms expected this year.
During the last 13 years, the Atlantic has seen a very large increase in
major hurricanes -- an average 3.8 per year. The past two years -- 2006 and
2007 -- had below-average and average activity, with only one Category 1
hurricane (Humberto) making landfall on U.S. soil last year.
The hurricane seasons of 2004 and 2005 were anomalies: Florida and the Gulf
Coast were ravaged by four land-falling hurricanes each year.
Hurricanes Charley, Frances, Ivan and Jeanne caused devastating damage in
2004 followed by Dennis, Katrina, Rita and Wilma in 2005.
May 29, 2008
Report: Gasoline Sales Up for Holiday but Down Year to Year
U.S. gasoline consumption jumped 2.7% last week ahead of the traditional
start to the summer driving season, according to the MasterCard SpendingPulse
report issued Wednesday. Demand, as measured by purchases at the pump, rose
245,143 b/d to 9.385 million b/d for the week ended May 23. However, the
measure was 5.5% lower compared to a year ago, in line with declines seen in
the last two reports.
The report takes in the Thursday and Friday before the Memorial Day holiday,
which is for much of the U.S. the first weekend getaway of the summer vacation
season. The volume rise is a "holiday-type increase," but isn't so surprising
given the low levels that preceded it, Michael McNamara, the report's chief
author said. The next report will reflect the rest of the holiday weekend.
The year-on-year comparison of four-week averages fell into even deeper
deficit, and shows that the consumption uptick typical for May didn't happen
this year, McNamara said. For the most recent week of data, the 9.191 million
b/d four-week average of gasoline sales was 6.3% lower than that seen a year
ago. Previous reports showed drops of 5.3%, 3%, 1.2% and 1.5%.
However, the year-on-year deficits may start to ease in the coming weeks,
which "says more about last year" than this year, McNamara said. Last year's
price increase to above $3.22/gal around Memorial Day -- a record at the time -- was followed by several weeks of lower pumping volumes. The total fell to
about 9.9 million b/d to 9.4 million b/d, he said.
"I wouldn't be surprised to see volumes down but there may not be as big a
gap as we've seen recently," McNamara said, depending on how much consumers
alter their driving behavior.
Year to date, gasoline pumping volumes are 1.7% lower than a year ago,
according to SpendingPulse data.
The national average price rose 8cts/gal last week to $3.84 for regular
grade gasoline and stood 19.6% higher than a year ago.
The Energy Information Administration (EIA) will report gasoline demand for
the week ended May 23 on Thursday when it releases its full petroleum status
report.
EIA implies demand from its measure of the total amount of gasoline
supplied from refineries, pipelines, blending plants and terminals on its way
to retail outlets.
May 22, 2008
Sharp Oceangoing Freight Rate Spike May Raise Crude Landed Costs in U.S.
Oceangoing transportation for crude and dirty oil products into the U.S.
have almost doubled from
a month ago, and that could lead to a higher landed
cost for crude, traders and shipping sources said on Thursday.
The outlook for freight rates was seen strong for the near term, judging
from the current strong demand and limited vessel supply.
U.S. refiners should continue to raise their refinery utilization rates,
despite the higher crude costs, if diesel and gasoline retail prices edge
higher.
Rates for a Very Large Crude Carrier (VLCC) delivering 2 million bbl of
crude from the Middle East to the U.S. were pegged at World Scale 145, up from
the April average of WS86.
The latest rate translates to a lump sum of about $12.5 million for ship
charterers. A ship
owner's take on that ship hire was estimated at $7.6
million, and the balance would go to
bunker costs and port charges.
Rates for a VLCC sailing from West Africa to the U.S. rose to WS228 from the
average of
WS120 in April.
Rates for an Aframax tanker delivering 70,000 tons of crude from the
Caribbean to the U.S. Gulf Coast shot up to WS350 on Thursday, with room to
rise to WS400.
Average rates in April were at W234, and rates were at WS260 a week ago.
In the VLCC market, shipping sources attributed the sharp rate hike to
wider price discounts for Saudi crude lifting in June. This prompted more
demand for ships in the Middle East.
Crude traders said that the sharp jump in tanker rates could depress the
crude price differentials for West African and other crude grades.
In the Aframax market, more demand was seen in Ceyhan, Turkey, as shippers
need more vessels to load Azeri crude, which is seeing higher output from the
Baku-Tbilisi-Ceyhan pipeline.
The Caribbean Aframax market is feeling the bullish sentiment in the
Mediterranean because more ships would sail that way to take advantage of the
higher rates there.
So far, refiners in the U.S. continued to raise refinery utilization rates.
For the week ended May 16, the U.S. refinery utilization rate rose to 87.9%
from 86.6% a year ago, but it remained below the 91.1% rate seen a year ago.
Middle distillates continue to be the cash cow for refiners, but gasoline is
slowly catching up as retail prices in some parts of the country begin to creep
above the $4/gal mark this week.
May 20, 2008
Gas Climbs Over $4 in 15 Cities; Diesel Cracks $5 in AK, CA Counties
Retail pricing data for the U.S. shows pump averages in 15 cities have crossed the $4/gal mark.
Chicago and Long Island are the newest additions to the list.
Also, 79 counties in the U.S. now show an average of $4/gal or more for gasoline, according to the AAA Daily Fuel Gauge Report.
And diesel prices continue to sprint off the charts. Two counties -- Yukon Koyukuk, in Alaska, and Mono, California -- have passed the $5/gal watermark, suggesting that it might not take $200/bbl crude oil to push prices to $5.50/gal and even $6/gal in some areas.
Crude oil futures settled at $127.05/bbl, up 76cts, after hitting an intraday high at $127.77/bbl.
Bridgeport, Conn., has beaten California to take the top spot for the metro area posting the highest gas price average -- $4.10/gal, based on AAA data for May 19. San Francisco's price was about a nickel cheaper.
The western U.S., home to some of the highest pump prices in the country, has more company
this week with more counties in New York, Connecticut, Illinois, Michigan, Texas, Florida and
West Virginia posting gasoline averages above $4/gal.
The number of counties with diesel averages above $4/gal has bloomed to
2,676 counties.
Next to Alaska and California, the highest diesel prices are in New York.
Westchester prices have popped to $4.967/gal, while Essex shows an average at $4.959/gal,
and the Bronx posted $4.947/gal.
May 15, 2008
U.S. Faces Onslaught of European Mogas Imports; Ugly Outlook for Refiners
The bearish U.S. gasoline market outlook for the near term could only get uglier for refiners even hough the largest oil consumer in the world is moving into the peak summer driving season, tarting next weekend.
The U.S. Northeast is expected to continue to face an onslaught of gasoline cargoes arriving from Europe, possibly well into early June, due to a wide open arbitrage window or very favorable
gasoline import economics.
The news of heavy gasoline inflow for the rest of May will not be music to the ears of refiners in the U.S. That would mean refiners would have to continue to rely on the lucrative distillates market to make up for poor gasoline margins.
"Gasoline cracks are not going anywhere anytime soon," a source said. "(Gasoline) cracks are going to stay between $6-$9/bbl, and distillates will remain the story."
Northeast margins in the past week were relatively unchanged at $8.81/bbl, and Gulf Coast margins increased by 13% or $1.39/bbl to $12.36/bbl, according to a weekly margin report published by Credit Suisse.
Although gasoline import data for the week ended May 9 were significantly lower than the
previous week, the import numbers are expected to jump sharply after May 15 due to a large
gap between deliveries.
Gasoline imports for the week ended May 9 was pegged at 915,000 b/d, compared with 1.494 million b/d in the previous week.
Total gasoline stocks also fell in tandem to 210.2 million bbl from 211.9 million bbl a week ago.
This was despite a higher refinery utilization rate.
The continuous strong demand for ships to deliver gasoline to the U.S. has prompted some
ship brokers to predict higher ocean-going tanker rates for the trans-Atlantic voyage in the
coming weeks.
The clean tanker market is facing a tighter supply as oil players are also looking for ships to deliver gasoil to Chile and Argentina.
More ships sailing to the southern hemisphere would mean less ships available to make the trans-Atlantic voyage.
Clean tanker rates for both transatlantic and Caribbean voyages have risen to the highest level so far this year at World Scale 320 and 295, respectively.
The weak gasoline market fundamentals are reflected in the double-digits cash price discounts in both the Gulf Coast and Northeast markets.
The bearish outlook for June was reflected in a weak offer of 11.5cts for June ratable conventional regular barrels in the Northeast.
The weak gasoline outlook is unlikely to help close the wide heating oil- RBOB price spread
on
the Merc.
That gap could only narrow if the high-flying European distillates prices come back to earth.
However, few players are willing to bet on the possible narrowing of the heating oil-RBOB spread due to the volatile price moves in the past few months.
This is despite the seasonal trend of higher gasoline demand and the end of heating oil season.
Also, some European and U.S. refineries should come back from turnarounds as planned by the end of this quarter. The U.K. refineries may sort out their operational problems eventually.
China may slow down its strong buying interest for oil products after the summer Olympics, and India may start up part of a huge export refinery to put more distillates into the spot market for sale.
May 13, 2008
Heating Oil Holds Hefty Dec Price Premium Over RBOB; May Signal
Scary Winter
The last heating season is barely over, and industry sources are already looking forward to
the upcoming season at the end of this year. The new heating season, although several more months to go, could signal another record-breaking one if we were to go with the early market indications so far.
"It could be a scary winter ahead as winter prices are already at record high," a source said.
The December price spread between heating oil and RBOB futures contracts on the NYMEX is at a record high of about 73cts/gal.
This is compared with the June price spread of about 40cts/gal and a typical heating oil-RBOB spread of about 15cts/gal around this time of the year.
"December heating oil usually holds a premium over gasoline, but this wide spread is definitely a record," the source said.
The record spread for December is almost at the same value of the front-month unleaded regular gasoline futures contract in early December 2003, which was pegged at a low of 78.40cts/gal.
Prompt heating oil was propped up by strong demand from Europe and a tight supply worldwide, and gasoline is under pressure from a slack demand and oversupply.
The heating oil-RBOB price relation for the forward months have been moving in tandem with the volatile front-month or June price spread, the source said as he explained the unprecedented wide December price gap.
However, some players do trade the December heating oil-RBOB spread even though it is pegged at a wide gap at more than 70cts, he said.
"Some players expect the December gap to narrow as it may be too wide, and some expect the current trend to continue until the end of this year," he said.
A second source pointed out that some players could be put off by the high heating oil price premium over RBOB for December, opting to stay out of the market for now.
However, these players would need to cover their requirements eventually, and the already high prices would soar higher when this buying requirement finally emerges.
If this paper price spread holds in December, consumers could be paying about 85-90cts/gal more for diesel than gasoline. This estimate is based on the current cash price differentials for both gasoline and ultra-low-sulfur diesel on the Gulf Coast.
New car buyers may have to rethink and weigh the monetary pros and cons of owning a car with a diesel engine, the second source said.