OTTAWA, Ont. - The pain at the pump has eased but we're not out of the woods yet.Warming temperatures in the east, a return to strong oil exports from Venezuela and allayed worries about oil supplies ...
HOW MUCH LONGER?: Diesel prices recovered in March but are we in the clear?
OTTAWA, Ont. – The pain at the pump has eased but we’re not out of the woods yet.
Warming temperatures in the east, a return to strong oil exports from Venezuela and allayed worries about oil supplies as American forces secure Iraqi oilfields have brought down diesel prices over the course of March.
According to price survey information from MJ Ervin & Associates, the national average retail diesel price slid from 84.4 cents per litre for the week ending Mar. 11 to 81.5 cents per litre for the week ending Mar. 25 to 77.5 cents per litre for the week ending Apr. 1 down to 74.4 cents per litre for the week ending Apr. 8.
The gradual decline in retail diesel prices followed more dramatic price fluctuations on the wholesale side: Montreal diesel rack prices peaked Mar. 1 at 57.5 cents per litre, then dropped to 36 cents per litre on Mar. 27. On Mar. 31 they crept up to 38.9 cents per litre. Toronto diesel rack prices peaked Mar. 4 at 58.5 cents per litre, then dropped to 37.1 cents per litre on Mar. 27. At the start of April, it was in the 40 cent per litre range.
“Crude prices are the underpinning and have dropped substantially,” says Bob Clapp, vice-president of the Ontario division of Canadian Petroleum Products Institute.
Ron Rosnak, senior petroleum analyst at En-Pro International Inc., explains how the crude oil markets have responded to developments in the international situation: “The Americans got into Iraq and got control of the oil wells, which was positive because they could have had a repeat of what happened in Kuwait where hundreds of wells were set on fire versus the six or seven this time.”
Other factors that drove down the price of crude, according to Rosnak, were OPEC’s March announcement promising to make up crude shortfalls as a result of the Iraq war and Saudi Arabia’s booking of eight additional two million barrel tankers. Filling of the tankers was scheduled for between Mar. 24th and Apr. 15th, representing 16 million barrels of crude above and beyond regular volumes.
Demand for middle distillates – heating oil and diesel – dropped as a spring thaw drifted across the northeast U.S. in the last 10 days of March. Along with the arrival of additional crude and refined product from Venezuela, the prospects for U.S. inventory levels started to look positive. In turn, pump prices fell.
“But we’re not out of the woods yet,” warns Rosnak.
Most oil analysts are reluctant to make oil price predictions, given the volatility of the international situation.
As Venezuela continues to struggle to emerge from strike-disrupted oil production, another OPEC country is on the brink of labor unrest. Reports from Nigeria estimate the shut-in of nearly 40 per cent of Nigeria’s crude oil output at the beginning of April. Compounding this is the pulling out of multinational oil company workers two weeks earlier when fighting erupted between rival ethnic groups near Warri in the oil-rich Niger Delta. Scores of people were killed, including soldiers.
War and civil unrest in the world is one thing, but the American conquest of the Persian Gulf is another.
“It’s really just because of the Middle East situation. That’s what it’s all about,” Clapp says in regard to the recent diesel price spikes.
According to Michael Ervin of M.J. Ervin & Associates, crude oil prices crept back up every day that U.S. troops had failed to take Baghdad. Even with the fall of Baghdad as Truck News was going to press, given the uncertainties of war, most observers expect the volatility of the past four months to continue.
For diesel prices to increase sharply, Rosnak speculates the war in Iraq would have to take a turn for the worse or escalate into neighboring countries. Or as Tom Kloza of the (U.S.) Oil Price Information Service puts it, “I’m going to say the prices have peaked, but if we piss off the Saudis in the next week or so, they haven’t peaked.”
Part of what makes crude oil pricing so reactive to the fortunes or spoils of war is the depleted state of U.S. inventories. As of Mar. 21, the U.S. Energy Information Inventory Report released these numbers: inventories of low sulfur fuels on the East Coast were at 12.3 million barrels, down 23.13 percent from last year’s 16 million barrels; high sulfur fuel inventories were at 15.99 million barrels, down 47 per cent from last year’s 30 million; and crude inventories were down 14 per cent.
“These inventory levels have to be rebuilt. If anything prevents them from being built, then you could have higher prices this fall and winter, especially if it is a cold winter like the last one,” says Rosnak.
But Kloza is not optimistic about regaining historic inventory levels in crude or any other distillate. The levels are so far below last year’s that he only expects they will regain “reasonably comfortable” levels by the third quarter – specifically in the case of diesel.
“I think we’re going to start the winter with lower basic inventory levels than we started with this past winter. That doesn’t mean it’s going to be as cold as it was this past winter. I’ve said this for gasoline and I’ll say it for diesel – we have a bipolar future. And that bipolar future means much higher prices in season and fairly low prices out of season. I call it the Oprah market down here. It expands and it contracts, but over time it seems to get a little larger,” Kloza says.
Diesel prices outstripping gasoline prices in early March were an example of an Oprah market.
The demand for middle distillates in the east remained strong because of the cold temperatures, so the prices of diesel remained high – they were “in season.” Gasoline prices, on the other hand, were low because they were “out of season,” as the summer driving season hadn’t arrived.
According to Clapp, “once the war started, people seemed to be a little less worried about supply.” It’s ironic that war should make for less worries about anything, but as Clapp puts it, we live in “interesting times.” Ultimately, restoring calm to the Gulf will prove the best remedy to reasonable diesel prices.