U.S. Consumers Better Positioned Against Global Oil Prices

gasolineBy Brian Milne, Energy Editor for Schneider Electric.

The U.S. gasoline futures market paused June 20 from an upside price onslaught amid profit taking in the ICE Brent crude futures contract, with the consolidation coinciding with a slowdown in the advance of Sunni militants in Iraq.

The campaign by the Islamic State of Iraq in the Levant came suddenly in June, spiking global oil prices, and creating the worst uncertainty for the Middle East region since the early 1970s, suggested at least one former high level CIA officer.

The immediate fear for the oil market was the rapid march by ISIS through Iraq’s northern and eastern regions, where the Sunni insurgents captured cities at will in their pursuit of creating a large Sunni state that includes parts of Greater Syria and Iraq. Watching the Iraqi army collapse in front of ISIS intensified the market’s concern that oil supply would be disrupted from the OPEC member, where production reached 3.1 million bpd.

Three days of heavy fighting at the 320,000 bpd Baiji oil refinery, Iraq’s largest refinery situated roughly 130 miles north of Baghdad, slowed the advance of ISIS, where both sides had claimed victory. Shiite militia units are joining the campaign against ISIS while volunteers pour in to firm Iraq’s military.

The Obama administration has sent 300 military advisors to help Iraq’s military in its fight with ISIS, while Obama declined U.S. airstrikes against the Sunni insurgents. The Shiite Muslim cleric Nassir al-Saedi in a sermon June 20, reportedly threatened to attack the advisors, with the cleric a loyalist to Muqtada al-Sadr. Al-Sadr’s militia had fought bloody battles in Iraq with US forces several years ago.

Analysts worry Iraq could become a fractured country between Sunnis, Shiites and the Kurds in the north, battling each other for control. There’s also concern Iran, a Shiite nation, could send in Iranian ground forces and revert Iraq to a puppet state. The best possible action for Western nations would be for a coalition government to be formed that represents the three large populations within Iraq’s borders, but that result is said to require extensive high level diplomacy and greater involvement by the U.S.

This complicated scenario highlights the difficulties in ending hostilities in Iraq, which threatens larger swathes of the Middle East, potentially for years to come. Currently, the oil market takes some comfort in the ISIS slowdown and what it sees is a far more difficult advance by the Sunni militants into southern Iraq, where the country exports the majority of its oil. Kurds have secured the export terminal in the north.

Events can turn suddenly, but for now further price spikes by global oil should be tempered, although additional gains should be expected. ICE Brent crude futures, which rallied to a $115.71 bbl 9-1/2 month high on June 19, could add another $2 to $4 bbl in value over the next several days.

Gasoline and diesel prices in the U.S. take direction from the Brent contract since the oil market is global. In ten trading sessions, the New York Mercantile Exchange Reformulated Blendstock for Oxygenate Blending futures contract spiked 21.72cts or 7.4% from a June 5 low to a June 19 11-month high of $3.1374 gallon. The contract can easily add another 3.0cts to the high, and potentially more than a dime.

The U.S. retail gasoline price average rose 1.2cts to $3.686 gallon during the week ended June 16, shows the Energy Information Administration weekly survey. The average will continue higher into the July 4 holiday, and could disrupt some holiday plans for travelers and dent demand, which is running 1.8% above a year ago.

However, the US has a far better balanced supply-demand disposition owing to growing domestic production that is at a 28-year high. U.S. crude prices, represented by the NYMEX WTI contract, are also at nine-month highs, but its discount to Brent is widening. U.S. gasoline production is surging, with improving refinery margins to encourage high processing rates.

The U.S. retail gasoline average will likely climb above $3.80 gallon in the short-term, but should hold below $4 gallon absent further losses by Iraq’s military and subsequent destabilization of the government. This might not sound all that great to the U.S. consumer, but compared to where the country was five years ago before the revolution in U.S. oil production the average would already by over $4 gallon and still advancing.

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