I understand that we are in the hazy mid-August days of summer, but from the questions I’ve been fielding recently (that is not a “dog day” baseball inference, and I mean it!), many consumers and those in the media are looking for something more than a humidity-induced foggy direction on where the horizon is when it comes to crude, diesel, and gasoline pricing.
On the horizon is a heavy mirage, with misleading guesses by the kings of shrugs, aka – the gaggle of Wall Street investment bankers. Equally confused are the very ones who should be beyond the realms of “confusedness” (my
Google approved word), namely the OPEC 14.
It’s my preference to avoid mathematical analysis of the weekly U.S. inventory reports, as they are normally straightforward. If gasoline inventories show a decrease in summer, then prices go up; If distillate inventories drop in winter, then diesel prices increase.
If it was as simple as that this year, then the pricing forecast would be no problem. But this year has been, and will continue to be, confusing to both producers and consumers because the pricing indicators have become mobile.
As I have mentioned in recent reports, historically, we are no longer in the high gasoline and diesel demand portion of the refining year – but this is not a historically normal year. Demand for gasoline, diesel, and jet fuel has remained in positive territory for the last six months, with no end to the trends in sight. This has forced the refiners to maintain high production levels, but they are now being penalized with the lowest refining margins in two years.
Inventories of all products are at overflow levels at the global pricing hubs in Houston, Rotterdam, and Singapore. Generally, crude price movements determine the end prices of finished refined products such as gasoline and diesel, but that law has been bent to the breaking point because of the glut level gasoline inventories. This means that gasoline inventories are determining crude prices, not the other way around.
Much to the concern of not only OPEC, but also Canadian and U.S. producers – as long as refiners keep pumping out product then there is nothing that can stop the fall of crude prices. If the status quo maintains its quo, then prices will continue to fall for crude and refined products well past Labour Day and into October.
Two groups want to do something about it – that is, get crude prices back up again.
Global refiners in general, and those in the U.S. in particular, see no choice but to cut back refinery runs to lower inventories and increase rack prices. This is happening now. The U.S. east coast refineries are now running 17% lower than a year ago at only 80 % capacity. A year ago the mid-west facilities were running at 99% but today have dropped by 6% to 93%.
OPEC also needs crude prices to go up. The self-proclaimed rumour mill has them setting up for a meeting in September at the insistence of their financial basket case member, Venezuela. This circus needs a new closing act as they never agree on a cut or cap on production, and their threat is a treat to the Wall Street futures traders and no one else.
The good news for consumers is that these actions by both are too little too late. Too much U.S. gasoline inventory to run down, and too little cooperation amongst OPEC that can’t agree on the definition of collusion – but we can.
That is clearly on the horizon.
Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada. All posts by Roger McKnight