By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Wholesale gasoline costs move mixed in our most recent weekly report, reflecting increasing available supply in some regional markets, namely Chicago, and worries over global oil supply tightness expected later this year.
The latter was amplified after members of the Organization of the Petroleum Exporting Countries failed to reach an agreement on production quotas at their June 8 meeting, the first time that has happened since the early 1980s. Saudi Arabia’s Oil Minister, Ali ali-Naimi, called it the worst OPEC meeting he has attended.
The Saudis had proposed, which was widely publicized ahead of the June 8 meeting, increasing OPEC production quotas to offset lost Libyan oil output amid civil war. The sought after increase in the quota was also triggered by estimates that increasing demand in the third quarter would outstrip production, while the International Energy Agency said the 12-member producer group needed to hike their production to lower oil prices that were threatening the global economic recovery. IEA threatened to release supply from emergency reserves held by its member countries if OPEC did not act.
The Saudi proposal had the support of half its members, while Iran and Venezuela led the opposition. Those two countries, through mismanagement of their oil revenues, have seen their production capabilities deteriorate and are said to not have the capacity to hike output; so they risked losing market share with an increase. The divisive meeting was seen however as a confrontation between Saudi Arabia and Iran amid the ongoing Arab Spring revolution in the Middle East that has and continues to change the region’s status quo.
Moreover, Iran and Venezuela have long been hawkish on prices to support their current leadership’s policies, which are anti-western. This runs contrary to the business disciplined Saudis, which fear high oil prices will lead to less demand for oil in the future.
OPEC’s divisiveness initially sent oil prices higher. A report in Saudi Arabia’s Al-Hayat newspaper that the kingdom would raise output unilaterally hit the markets on Friday however, triggering a selloff. According to the report, the Saudi’s are increasing their oil production to 10 million barrels per down, a level that hasn’t been seen by the kingdom since the early 1980s.
Meanwhile, implied gasoline demand declined by 2.8% during the week-ended June 3, which captured Memorial Day, according to preliminary data from the Energy Information Administration, which implies less robust travel demand for the holiday weekend with the unofficial title of being the kickoff to the summer driving season.
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Typically, you would see greater demand during the week in front of the holiday, as suppliers and wholesalers move product downstream ahead of the expected increase in fuel volume sales. Indeed, during the four-weeks ending June 3 implied demand increased 0.3% against the comparable year-ago period. Yet, high oil prices this spring along with a persistent high unemployment rate has dampened demand for gasoline, with implied demand is down 0.3% during the first five months of 2011 compared with the same timeline in 2010.
The EIA also reaffirmed their belief that retail gasoline prices peaked for the season in early May, with the US gasoline average at $3.965 gallon, a 32-month high. As of June 6, the average had fallen to $3.781 gallon.
The EIA projects a $3.75 gallon US gasoline average for the summer period, which runs from April 1 through September 30. For the full year, EIA estimates a $3.60 gallon US gasoline average.
About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 15 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.