Tuesday, March 13, 2012

What's Driving Oil Prices?

If the Hormuz Strait hasn't been closed yet, then we must be looking at an Iranian conflict to justify current market prices, at which point high U.S. gasoline prices will be the least of our worries. However, just checking some recent reports from the Energy Information Administration still suggests that there are few fundamental economic reasons for crude oil prices being where they are today.

The first thing EIA notes is the unusually large spread between WTI and Brent, with West Texas Intermediate currently priced at around $106 per barrel, verus Brent at $125.  It turns out that there are technical reasons for this spread.  The Buzzard Field in the North Sea has been having technical production problems for the past ten months, according to EIA, and though its production is small, its output is a key part of the Forties crude blend, which is key to driving the quote for Brent. 

U.S. 50 State liquid fuels production for Jan-Feb 2012 compared to the same period in the prior year, is up 7.3%, driven as the papers remind us, by the tight oil boom, and in response to some technical issues of scheduled maintenance at Canadian tar sands facilities in February. 

Now, looking at U.S. 50 State consumption of liquid fuels for the same two month period, it is 18.3 million barrels per day (mbd) compared to 19.0 mbd in the same period a year-ago, a decline of 3.7%.  Chinese consumption, according to the preliminary February numbers is up 4.2%, while world consumption, according to the EIA figures is up only 1%. 

We don't know if there are technical factors affecting the uptick in Chinese consumption, but the overall profile of world demand doesn't support sustained uptrends in crude prices.  In fact, at the beginning of February, WTI was about $5 a barrel cheaper, but this was the beginning of the drumbeats about Iran closing the Strait of Hormuz.

In Western economies, particularly in the U.S. there is a dominant trend of energy efficiency as measured by energy consumption to GDP.  There's no reason to believe that this won't continue. There is an argument that the level of swing, or excess capacity, in world oil output is at a historical low, but as a factor in driving prices upward, it shouldn't be a big determinant when global demand is soft overall.

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