Brian L. Milne, Refined Fuels Editor, Telvent DTN
A string of refinery outages in late July, early August continues to drive retail gasoline prices higher, with the U.S. retail average gaining for five straight weeks through Aug. 6 to reach an 11-week high at $3.606 gallon per the Energy Information Administration’s (EIA) weekly survey. Since the start of July when the advance in retail prices began, the EIA’s U.S. average has surged 31.5 cents or 9.6%.
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Refinery outages, whether in Tulsa, Whiting, Ind., or San Francisco, are part of the collective impetus responsible for tightening the U.S. gasoline market and spiking wholesale prices. In the regional spot markets, which drive price changes at the terminal and eventually at the retail level, gasoline prices surged to three and fourth month highs in early August. Those gains will continue to be passed through the supply chain to retail outlets.
Retail fuel prices are also reacting to surging crude prices, especially Brent crude futures which trade on the ICE Futures platform and serve as an international price marker for crude oil. Amid the bottleneck of crude oil at the Cushing hub that has held New York Mercantile Exchange crude futures at a steep discount to Brent, with the spread reaching a 10-month high early August at a more than $22 a barrel Brent premium, oil refiners have focused on Brent crude prices in their spread assessments. Brent crude futures rallied to more than $115 barrel in starting out the new week.
A North Sea crude oil, Brent has rallied this summer on heavy maintenance activity in those offshore fields, and an increasing geopolitical risk premium as sanctions thwart Iranian crude oil sales. A growing conflict in Syria, a close ally with Iran, also adds to the risk of a possible action by Tehran that would disrupt oil supplies in the Middle East; namely targeting the Strait of Hormuz.
The strait is a key shipping lane for oil that is narrow at points while bordering Iran. Approximately 20% of the world’s oil consumed in 2011 passed through the Hormuz Strait in 2011. It was also the location where over the weekend a U.S. Navy destroyer collided with a Japanese oil tanker. The accident was minor, and no oil spilled, but highlighted increasing traffic in the waterway amid a U.S. naval buildup in the region to counter Iranian threats.
Slowing economic growth worldwide has largely capped the upside in oil prices, with oil demand linked to economic performance. Sovereign debt issues in the euro zone have limited growth not only in Europe, but also the U.S. and China as exports to the region slide.
A market belief that the European Central Bank and leaders within the euro zone would hammer out steps to gradually solve the region’s high debt level and low to zero growth has also lent market support. For the U.S., a number of market watchers are also expecting the Federal Reserve to announce in September some form of monetary easing policy to act as a stimulus to push up employment, with previous QE efforts having the side effect of weakening the U.S. dollar while driving commodities including oil prices higher.
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 16 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.