Big Crude Draw, Egyptian Coup Rally Oil Prices

By Brian L. Milne, Energy Editor, Schneider Electric

gasoline editRetail gasoline prices dropped to winter levels in ushering in July, with the Energy Information Administration’s (EIA) U.S. retail gasoline price average sliding to $3.496 gallon July 1, the lowest the average has been since the end of January earlier this year.

It’s odd in one sense that retail gasoline is hovering near January price points considering demand is typically weakest in the winter and strongest in the summer.

Gasoline costs surged late winter through spring on several factors, including a rash of unplanned refinery outages during a heavy turnaround season. The U.S. average spiked to $3.784 gallon Feb. 25—the current high for the average in 2013. Returning refining capacity and overall tepid demand pressured gasoline costs in June, with the EIA reporting the US refinery run rate at 92.2% during the last week of June—the highest run rate in 2013. Preliminary data from the EIA also shows implied gasoline demand up 0.1% during the first six months of the year compared with 2012, but down 4.5% from the five-year average.

Events during the first week of July pushed gasoline costs sharply higher across the country however, with climbing offers at distribution terminals set to lift prices at retail.

Demand Surge
For fundamentals, a 10.3-million barrel drawdown in U.S. commercial crude stocks during the last week of June joined by larger-than-expected declines in gasoline and distillate supply and big bump ups in demand for gasoline and diesel during the one-week period fueled a rally in oil prices.

Gasoline demand surged 400,000 bpd to 9.294 million barrels per day (bpd) to end the first half of 2013, the greatest weekly demand figure in two years. Analysts will await further data in the coming weeks to identify if the surge in implied demand—a figure showing how much gasoline moved from the primary market to downstream markets—is due to a jump in consumption, or if some of that demand was downstream stockpiling ahead of the July 4th holiday weekend.

New York Mercantile Exchange crude oil futures with nearest delivery spiked to over $100 per barrel for the first time since September 2012 during the first week of July, and have since surged to $104.12 per barrel—the highest the contract has been since May 2012. Pushing crude through the century mark was the military coup in Egypt July 3, with fighting now taking place in city streets of the North African nation.

Oil analysts worry oil moving through the Egyptian-controlled Suez Canal or the SUMED pipeline that traverses the country could be disrupted. Combined, the two supply channels have a three million bpd capacity.

Oil markets will continue to watch the Egyptian crisis, which will provide a floor for oil prices in the near term. Otherwise, ample supply in the U.S. should weigh on markets, offering a cap on the upside. Economic data, with U.S. figures including higher new job creations during the second quarter then envisioned, are also bullish for oil prices. On the flip side, good U.S. economic data could prompt the Federal Reserve to begin tapering down its stimulus efforts which should support a stronger U.S. dollar while prompting a selloff in commodities and equities some suggest.

About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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