Friday, February 18, 2011

"Here comes $4 gasoline" (U.S. oil prices look reassuringly calm till you look below the surface)

From Fortune:
At first blush, a replay of the 2008 gas price spike seems far fetched. The biggest driver of U.S. gasoline prices is the cost of crude oil, and near-month oil futures on the New York Mercantile Exchange have sat out the scorching commodities rally. They lately fetched $85, some 40% below the crisis peak.

Food for unsettling thoughts

But that's where the good news ends for motorists -- and for a U.S. economy that is sputtering even with gas at $3.15 a gallon.

Much of the oil being made into gasoline now actually costs $105 a barrel. For this we can blame a few of the usual suspects – try Middle East unrest and strong overseas economic growth – and one new one, a weak link in the U.S. petroleum supply chain.

Those factors make the Nymex price "irrelevant for the price of U.S. gasoline," says Olivier Jacob, who runs the Petromatrix trading advice firm in Zug, Switzerland.

Even the government agrees. Last week it projected a 1-in-3 chance the gas price will break $3.50 this summer and a 1-in-10 chance it will hit $4. And if anything those estimates may understate how fragile the balance is.

"It would not take much" to send gas prices back to $4, says Jacob. Cold weather, Saudi reluctance to increase production and possible refinery outages could all play their part.
Even a smaller rise could slow the snaillike recovery of the U.S. economy. Jacob and others say $3.50 a gallon this summer looks like a good bet, and a gas price at those levels could kneecap the limping jobs market yet again.

A study released last month by IHS Global Economics says a 25-cent rise in the gasoline price, all else equal, will reduce employment by some 600,000 jobs over the following two years. And the steeper the rise, the more jobs that stand to be lost.

"Suddenness is very important in determining how much damage is done to the economy," says IHS economist Gregory Daco.

So how do you get $4 gas when oil is just $85? The answer starts with some unprecedented behavior in global oil markets, where the benchmark European oil standard, known as Brent crude, is trading at a $20-a-barrel premium to the U.S. benchmark, the West Texas Intermediate futures contract that trades on Nymex. The two typically trade within a few dollars of one another....MORE
HT: Energy Bulletin

Jan 19
"Oil shocks and economic recessions"
Dec 28
"Ex-Shell president sees $5 gas in 2012"
Dec 21 "‘Fuel apocalypse’ to come: Gas could top $3.75 by spring, analyst says" and "Refining outlook: Slightly less bleak than a year ago" (TSO: VLO; MUR)