Oil and Gasoline: A Tale of Two Prices
A number of you have contacted me asking some variation of the same question.
How can the price of oil be declining, yet the price of gasoline remain so high?
At close of trade yesterday, the West Texas Intermediate (WTI) benchmark futures crude oil contract for the near out month in NYMEX trade had declined 2.6% for the week and 4% for the month.
However, the same contract for RBOB (Reformulated Blendstock for Oxygenate Blending) - the NYMEX gasoline futures standard - was up 1.6% for the week and 4.2% for the month.
Normally, we expect that movements in the crude oil price, as the single-largest component in oil product prices, would pretty much dictate where gasoline is headed.
And in normal circumstances, that is usually the case.
Welcome to the Unusual Pricing CaseThe current gasoline phenomenon results from several factors:
- Refinery capacity utilization;
- The continuing outsized spread between WTI and Brent oil prices in London; and
- The mix of increasing unconventional domestic oil flow (shale, heavy, tight oils produced in the U.S., synthetic oil from oil sands coming down from Canada); and
Put simply, while we are using more of this new "replacement oil" than we ever have (a good thing for those concerned about reliance on imports from abroad), its use is also adding to the price at the pump.
Of greater importance, however, is the second element: the WTI-Brent pricing environment.
We have talked about this spread on a number of previous occasions. Brent is again selling higher by about 20% to the price of WTI.
That's important when factoring in the actual cost of the feeder stock for refineries.
While the WTI price has been going down (until this morning), Brent has been more subdued. In fact, the Brent price is down only 0.5% over the past month and is slightly higher (also about 0.5%) over the past week.
This year, the U.S. market is likely to be importing on average about 45% to 47% of what it needs on a daily basis. Only a few years ago, that market was dependent on imports for two-thirds of its requirements.
Additionally, American domestic daily production will be close to 10 million barrels, a level not seen since the mid-1990s. That is a result of the acceleration in unconventional extractions in places like the Bakken in North Dakota, the Monterey in California, and Eagle Ford in Texas, as well as for prospects for new basins like the Utica in eastern Ohio.
There's another important question that needs to be asked at this point.
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Not Even Saudi Arabia Can Save Us From High Oil Prices
With oil prices soaring ever higher, Saudi Arabia stepped in last week and vowed to increase its production by 25% if necessary.
But while that assurance managed to siphon a few dollars off of oil futures, the reality is there's nothing Saudi Arabia - or anyone else, for that matter - can do about rising oil prices.
In fact, crude is still on track to reach $150 a barrel by mid-summer.
As Saudi Oil Minister Ali Naimi pointed out last week, current oil supplies already exceed global demand by 1 million-2 million barrels per day.
For its part, Saudi Arabia is already breaking its own OPEC-imposed production quota limit, churning out about 10 million barrels of oil per day - close to its 12.5 million barrel capacity.
Yet the effect of that production has been negligible.
Oil is still trading at $106 a barrel on the NYMEX - something that has clearly flummoxed the world's largest oil producer.
"I think high prices are unjustified today on a supply-demand basis," said Naimi. "We really don't understand why the prices are behaving the way they are."
Naimi and his colleagues may not understand oil's price gyrations, but Dr. Kent Moors, an adviser to six of the world's top 10 oil companies and energy consultant to governments around the world, does.
"Despite the excess storage capacity in both the U.S. and European markets and the contracts already at sea, oil traders set prices on a futures curve," said Moors. "In a normal market the price is set at the expected cost of the next available barrel. During times of crisis, on the other hand, that price is determined by the cost of the most expensive next available barrel."
And with tensions with Iran running high, we are currently in crisis mode. Pushed to the brink by Western sanctions, Iran has threatened to close the Strait of Hormuz - the narrow channel in the Persian Gulf through which 35% of the world's seaborne oil shipments and at least 18% of daily global crude shipments pass.
If Iran closes the Strait of Hormuz, crude oil prices will pop by between $30 and $40 a barrel within hours. Should the strait remain closed for 72 hours, oil trading will push up the barrel price to $180 in New York, and closer to $200 in Europe.
The situation is further complicated by potential military conflict - such as an Israeli air strike on Iran's nuclear facilities.
And with indications that Iran will have the ability to develop nuclear weapons in the next 18 to 24 months, Western powers have apparently shifted their focus from halting Iran's nuclear program to sowing instability in the country with the hopes of catalyzing a regime change.
So what does that mean for investors?
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Marathon Petroleum Corp. (NYSE: MPC): The Best Way to Turn High Gas Prices into High Octane Profits
Average gas prices currently are about $3.75 according to AAA's Daily Fuel Gauge Report.
That's higher than the average for all of 2011, which was the priciest year ever for gasoline. And what's worse is they're only going higher from here.
But if you think that investing in oil majors will help you overcome the sting of high gas prices this summer, think again.
While prices for both gasoline and crude oil have surged more than 10% this year, stock prices for oil majors like ExxonMobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) have been flat.
The dividends these companies pay won't make a dent, either.
It would take the average American something along the lines of a $20,000 investment in a stock that yields 3% to compensate for the surge we've seen in gas prices.
One reason these stocks have floundered is that the recent rise in oil prices has largely been the result of political tensions in Iran, rather than increased demand for oil.
Another is that President Obama has Big Oil subsidies in his crosshairs as he heads into this year's election.
Energy lobbyists have flooded Capitol Hill and Republicans have rallied to the defense of oil companies, but the November election will ultimately decide the fate of the $4 billion of subsidies oil majors get every year.
With so much money at stake, investors are rightfully wary of companies like Exxon and Chevron.
Still, that begs the question: If big oil stocks offer no respite from high gas prices, where can investors turn?
One solution is to invest in the United States Gasoline Fund LP (NYSE: UGA).
UGA invests in futures contracts on unleaded gasoline traded on the New York Mercantile Exchange (NYMEX). It's already up 18% this year.
But there's still an even better option, and that's
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Gas Prices Spike: Ease the Pain of $5.00 Gas with UGA, USO, COP, XLE
February is typically a month when gas prices recede - but not this year.
Average gas prices currently are about $3.69 according to AAA's Daily Fuel Gauge Report. That's higher than the average for the whole of 2011, which was the priciest year ever for gasoline.
The average price for U.S. gas has climbed more than 10% in just the past two months. This suggests a trajectory that could produce a spike of 60 cents a gallon or more by May.
"I actually believe that prices will be moving higher than 60 cents a gallon on average," Money Morning energy expert Dr. Kent Moors recently told Executive Editor William Patalon III. "By mid-summer, in fact, we could see $5 a gallon being reached in certain regions of the U.S. market."
Here's why we could be facing the most painful year at the pump - and how you can offset record-breaking gasoline costs.
What's Driving U.S. Gas Prices to $5 a GallonUsually, higher gas prices result from low supply and high demand, but that's not the case this year. Even with consumption growing in emerging markets like China and India, the current surge in gas prices isn't based on increased demand for crude oil.
In fact, according to Tom Kloza, chief oil analyst for the Oil Price Information Service (OPIS), demand for oil is at its lowest point since April 1997.
Instead, there are a new set of factors pushing U.S. gas prices higher, including:
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2012 Natural Gas Price Forecast: Why to Avoid the "Widow Maker"
I've been watching natural gas for years now and find myself shaking my head lately.
The cost to buy the "clean energy" is collapsing as crude oil, a product that needs refining, stays above $100 per barrel.
In fact, this chart for natural gas is what I call a Widow Maker.
Take a look...
As you can see, it shows the price of the March 2012 NG contract over the past two years - and it's not pretty.
Why Natural Gas Prices Will Continue to DropThe last time I wrote about natural gas for Buy, Sell or Hold was November 2010.
At the time, natural gas was about to start its most seasonally bullish period of the year. I recommended a multi-month trade with an exit by the end of the March 2011 contract.
However, this year is completely different. Natural gas has collapsed in price instead of climbing during the peak winter cold months.
While it's been a warmer than normal winter across the United States, especially in the Snow Belt, this price drop has more to do with U.S. production rising on a year-over-year basis than it does the weather.
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Prepare for Iran's Energy Market Chaos with the United States Oil Fund LP (NYSE: USO)
Iran kicked off the New Year with aggressive messages for the Western world, setting the stage for heightened political tensions and a huge oil price push in 2012.
Oil futures finished at their highest level in eight months yesterday (Tuesday), with West Texas Intermediate crude jumping 4.2% to settle at $102.96 a barrel on the on the New York Mercantile Exchange (NYMEX).
The surge came after Iran warned a U.S. aircraft carrier to stay out of the Persian Gulf. The message fueled speculation that Iran will make good on its threat to close the Strait of Hormuz to oil tankers.
An average of 14 supertankers carrying one-sixth of the world's oil shipments every day pass through the Strait, a narrow channel which the U.S. Department of Energy calls "the world's most important oil chokepoint."
With global oil demand expected to rise to a record 89.5 million barrels per day in 2012, a major disruption to oil exports from Iran would drastically affect pricing.
Even though Iran has made such threats repeatedly over the past 20 years, tighter sanctions imposed by the United States and Europe may have pushed the country to its breaking point. Iran just concluded a 10-day military exercise intended to prove to the West that it can choke off the flow of Persian Gulf oil whenever it wants.
Now Iran is expected to trigger oil market performance similar to spring 2011, when Libya's civil war caused oil prices to spike close to $115 a barrel.
In fact, if the Iranian government made good on shutting down the Strait, oil prices would probably shoot up $20 to $30 a barrel within hours and the price of gasoline in the United States would rise by $1 a gallon.
While we can't control Iran's actions, we can control how we prepare for whatever political and economic turmoil it inflicts. That's why it's time to buy the United States Oil Fund LP (NYSE: USO).
Global Political Tensions Will Bolster US Oil FundIran is trying to scare the world out of imposing more sanctions against it, which drastically limit the country's ability to conduct business.
The latest sanctions, signed into law by U.S. President Barack Obama last Saturday, will make it far more difficult for refiners to buy crude oil from Iran, the world's fourth-largest oil exporter.
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Should We Be Worried About Iran?
If the Iranian government makes good on its recent threats to stop oil shipments through the Strait of Hormuz, oil prices would shoot up $20 to $30 a barrel within hours and the price of gasoline in the United States would rise by $1 a gallon.
Such a steep spike in crude oil prices would plunge the United States and Europe back into recession, said Money Morning Global Energy Strategist Dr. Kent Moors.
Iran just concluded a 10-day military exercise intended to prove to the West that it can choke off the flow of Persian Gulf oil whenever it wants.
The world's fourth-biggest oil producer is unhappy with fresh U.S. financial sanctions that will make it harder to sell its oil, which accounts for half of the government's revenue.
"Tehran is making a renewed political point here. The message is - we can close this anytime we want to," said Moors, who has studied Iran for more than a decade. "The oil markets are essentially ignoring the likelihood at the moment, but any increase in tensions will increase risk assessment and thereby pricing."
One reason the markets haven't reacted much to Iran's latest rhetoric is that although it has threatened to close the Strait of Hormuz many times over the past 20 years, it has never followed through on the threat.
But a fresh wave of Western sanctions could hurt Iran's economy enough to make Tehran much less cautious.
The latest sanctions, signed into law by U.S. President Barack Obama on Saturday, will make it far more difficult for refiners to buy crude oil from Iran. And looming on the horizon is further action by the European Union (EU), which next month will consider an embargo of Iranian oil.
"The present United Nations, U.S. and EU sanctions have already had a significant toll," said Moors. "They have effectively prevented Iranian access to main international banking networks. Iran now has to use inefficient exchange mechanisms."
Because international oil trade is conducted in U.S. dollars, Moors said, Iran must have a convenient way to convert U.S. dollars into its home currency or other currencies it needs, such as euros.
Pushed to the BrinkThe impact of the sanctions combined with internal political instability has driven Iran to turn up the volume on its rhetoric.
"Tehran has limited options remaining," Moors said, noting Iran has historically used verbal attacks on the West to distract its population from the country's problems. "The Iranian economy is seriously weakening, the political division among the ayatollahs is increasing, and unrest is rising."
Analysts worry an Iranian government that feels cornered would be more prone to dangerous risk-taking in its dealings with the West. So while totally shutting down the Strait of Hormuz isn't likely, Iran could still escalate a confrontation beyond mere talk.
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Why Oil Prices Won't Stay Down For Long
Oil prices, like stocks, took a few big hits last week.
West Texas Intermediate crude last week dropped below $80 a barrel before bouncing back up to $87 a barrel this week. Meanwhile, Brent crude fell to a six-month low below $100 a barrel before climbing back to $110 a barrel this week.
To hear the mainstream media tell it, much of the drop is based on the assumption that global growth is waning and oil demand is soon to follow.
But that couldn't be more wrong.
Energy is one of the most highly leveraged and most liquid trading vehicles on the planet. A good portion of the decline we've experienced in recent weeks can be explained by nothing more than trading houses raising cash to meet margin calls or redemption requests from hedge funds, pension funds, and other investors.
That's all there is to it. Firms simply need cash and are selling the most easily sellable assets they've got. In the past that's been gold, but lately it's been oil.
Longer-term, demand is still going up and $120 a barrel oil is our next stop, followed by prices of $150 or more in the years ahead.
What's happening now with the markets and energy prices is like being in the eye of a hurricane.
That is, it won't be long before we're once again caught up in the whirlwind growth of emerging markets and energy demand shoots sharply higher.
The Looming Demand DownpourGlobal demand is still rising - and it's not going to slow down any time soon. There are huge swaths of the world now adopting gasoline engines.
Let me give you two examples.
Take the farmers in Cambodia. Many put up sheets in their fields at sunset. They then mount small incandescent light bulbs on sticks behind the sheets. The bulbs are powered by small gasoline generators to ensure they stay on all night.
In the morning, those farmers go back and harvest the thousands of crickets that have collided with the sheet after having been drawn to the lights. They wrap up the fallen bugs and head to the markets where they are sold as food.
It's much the same situation in Africa, where small villages require simple engines to pump water.
You may think bugs and small farm pumps are no big deal, but there's an even greater energy revolution going on in the transportation industry.
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Oil Prices Look to Top $150 by Midsummer On Resilient Demand and MENA Turmoil
Money Morning predicted in its 2011 Outlook series that oil prices would see $100 a barrel by summer. And that's proven to be true - but not entirely for the reasons we discussed.
In addition to the increased demand we talked about in January, violence in the Middle East and North Africa (MENA) has driven oil prices into the stratosphere. The price of light, sweet crude climbed above $112 a barrel last week, up more than 22% from where it started the year.
A recent pullback has driven prices back down to about $107 a barrel, but don't be fooled. Strong demand in emerging markets, a weak dollar, political turmoil in the MENA region, and a strong speculative sentiment will continue to push oil prices higher.
Buy, Sell or Hold: Brigham Exploration Co. (Nasdaq: BEXP) is a Strong Growth Play Poised to Profit from Higher Oil Prices
The energy crisis of 2008 - during which oil prices climbed to $147 per barrel before falling to the low $30s - led to some big rewards for investors locked in to the right companies. But with oil prices again approaching $100 a barrel, it's important to remember that not all oil plays are profit machines.
However, one company that is worth watching is Brigham Exploration Co. (Nasdaq: BEXP).
Brigham is an oil & gas exploration company that's focused on the Bakken Formation in the Montana and North Dakota area of the United States. The company operates on an area of about 200,000 acres and says it could have as many as 1,600 drilling locations on its Bakken property. I would be shocked if it ended up drilling 25% of those locations, but it is always nice to know that there is a solid inventory of prospects waiting in the wings.
Brigham has turned the Bakken into one of the largest on shore fields in America, and the oil that's now being produced there is increasingly valuable. However, equally valuable is the proprietary knowledge Brigham has derived from the project.
Gas Prices are Headed Higher – Here's How to Profit
As Money Morning predicted in its 2011 Outlook for oil prices, crude is poised to surge over $100 a barrel this year. And gas prices are likely to follow suit - perhaps even testing their record high above $4 a gallon.
In fact, one expert - former president of Shell Oil John Hoffmeister - predicts prices at the pump will top $5 a gallon.
The price of benchmark crude on the New York Mercantile Exchange (NYMEX) settled at $88.03 a barrel on Friday, after rising as high as $91.53 a barrel earlier in the week.
From there, black gold is set to shoot past the $100 a barrel mark and back toward the record territory it first established in 2008.
How the U.S.-China Trade Spat is Jeopardizing Energy Sector Development
Usually, a government decision to subsidize clean energy alternatives would be applauded by others.
Not so when the government is Beijing, and Washington politicians halfway around the world are busy looking for votes.
This tiff could be filed away as just another tempest in a teapot... if it were not for the other important projects it could derail along the way. Those projects just happen to have a major impact for American natural gas technology and the companies likely to benefit from its foreign introduction.
If the two countries can get it together, it could mean profitable new opportunities for both.
To find out how the energy sector would benefit from U.S.-China cooperation, read on... Read More...
CNOOC Creates Biggest China-U.S. Oil Deal For Stake in Shale Gas Industry
China's state-owned energy company China National Offshore Oil Corp. (CNOOC) (NYSE ADR: CEO) late Sunday announced it would invest $2.16 billion in U.S.-based Chesapeake Energy Corp. (NYSE:CHK) to increase China's stake in unconventional gas resources like shale gas. It is the largest ever China-U.S. oil and gas deal.
CNOOC initially will pay $1.08 billion for a 33% stake in Chesapeake's Eagle Ford shale acreage in Southern Texas. China's third-largest oil company will invest an additional $1.08 billion by paying 75% of Chesapeake's drilling and completion costs in coming years, allowing Chesapeake to tap hard-to-extract shale gas deposits and boosting its weak balance sheet.
The deal highlights China's need to develop its shale-gas extraction techniques. The country has 26 trillion cubic meters of shale gas reserves that are largely unexplored due to a lack of drilling ability - and Chesapeake is a pioneer in the shale gas industry.
This China Province Will Become a Global Oil-and-Gas Market Powerhouse
Like everything else, the balance of power in the global energy market is shifting toward China, where a little-known province is perfectly situated to become a global oil-and-gas market powerhouse.
Nestled in the far northwest of China, Xinjiang is the country's largest province and the primary domestic source for oil and gas. It is sparsely populated and as big as Western Europe. The name, Xinjiang, literally means "New Frontier." And recent decisions in Beijing are going to give that translation even more meaning - transforming this province into a "new frontier" for the global energy sector.
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Gasoline-Price Forecasting: What Sam the Gas Station Owner Knows That We Don't
What started out as a routine fill-up at the service station that I frequent has turned into a solid gasoline-price-forecasting model that should spotlight the most-imminent profit opportunities.
Of course, it wouldn't have happened without Sam.
Sam runs a gasoline station 12 miles from my house, in a little, out-of-the-way, suburban town. We have formed a friendship, of sorts, through the years. He's one of the few people I run into on a regular basis who does not ask me where gasoline prices are headed.
He already knows.
To find out how Sam's pricing prescience can mean profits for you, please read on... Read More...