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March 8, 2013

March 08, 2013


Macroeconomic Factors

The macroeconomic story has three parts:

1. The U.S. – showing continuing growth but lower than long-term trends.

2. Europe – where we see an overall recession with no clear path to a solution. While the ECB is committed, the most recent concern is the Italian election. Is it a surprise that many average citizens are unhappy about extreme austerity? And they might be right! It is quite possible that Italian leaders, with choices restricted by voters, will seek more compromise on austerity.

3. China provides continuing mixed signals. Last weekend’s 60 Minutes program showed the ghost cities and the real estate bubble. This clearly suggests a change in internal policies, but what are the implications for the Chinese effect on the global economy?

Potential Risks

In recent weeks, gas consumers have faced a rather counterintuitive problem. Namely, they continue to pay hand over fist at the pump even while crude oil prices are falling. Essentially, this strange relationship illustrates the degree to which the average consumer is at the mercy of small price shocks and international turmoil.

Marketwatch reports:

“Traditionally, the two are reasonably well related,” said Andrew Wilkinson, strategist at Miller Tabak & Co., in a note Monday. “But the relationship has morphed over the years as refineries go offline and as the price of Brent crude, from which gasoline is refined, remains historically high.”

As of late, refinery issues of exactly this sort have only compounded. A blogger for The Hill recently analyzed some of the latest numbers from the Department of Energy in an attempt to explain the disparity:

“…a brief Energy Information Administration report Monday explains that several factors, such as refinery outages (both planned and unplanned) and growing global demand for petroleum products, account for most of the rise.

These factors have driven an increase in the difference between crude oil prices and wholesale gasoline prices, which is called the ‘crack spread.’ The EIA says the growing gap accounts for ‘most’ of the roughly 45 cents-per-gallon rise in gasoline prices between Jan. 1 and early last week.

‘While these factors have played an important role, other factors, such as preparations for the seasonal switch to summer grade gasoline, may also have contributed to recent short-term movements in wholesale gasoline prices that are reflected in crack spreads,’ reports the EIA, which is the Energy Department’s independent statistical arm.”


The chart below shows the monthly change in the forward curve, with an apparent bottom in December of 2012. This has been followed by steady increases, while the seasonal pattern was preserved. The most recent data show a nice dip in the futures curve. Only sophisticated buyers are aware of this! There are (finally) some good bargains for next year.


To download a more detailed version of this report CLICK HERE.

Filed under:Eyes on Energy | by Fuel Expert @ 4:21 pm | 

A Quick Note on the Death of Hugo Chavez


The nature of the international oil markets was changed this week by the death of Venezuelan President Hugo Chavez. ABC News reports:

“Chavez died Tuesday at age 58 from a massive heart attack, according to the head of Venezuela’s presidential guard. He had been battling an undisclosed form of cancer for 14 years.”

While Chavez’ poor health was well known, the world is still struggling to predict what his legacy will be for the Venezuelan people. At this point, it is yet unknown whether Nicolas Maduro – Chavez’ likely successor – will pursue the same socialist policies.

Energy investors are unemotional and ruthless, acting immediately on the news as soon as it breaks.  Our preliminary assessment is that a Chavez successor will gradually increase the oil supply from Venezuela.  We also believe that any change is more than a year away.

Filed under:Price Shocks | by Eyes on Energy @ 11:05 am | 

March 5, 2013

Odd Inconsistencies in March Pricing


The American Automobile Association reports gas prices have dropped significantly over the last month, though the market remains exposed to significant risk. According to the Lincoln Journal Star:

“…regular unleaded gasoline was selling for just under $3.72 a gallon on average in Lincoln as of Monday. That’s 7 cents less than a week ago and three cents cheaper than a year ago. However, it’s 17 cents higher than a month ago.

That’s not a whole lot of relief, considering the huge surge in prices to start the year, but there is likely to be some more coming in the next couple of weeks.

AAA Nebraska spokeswoman Rose White said oil and gas prices have been very volatile and unpredictable lately, but signs point to prices dropping further in the next week or two. Crude oil prices have fallen about $8 a barrel in the past month, and prices dropped below $90 a barrel Monday for the first time this year. White also said there was an additional two-cent drop in wholesale gasoline prices on Monday.”

At the same time, these price moves are not what analysts would generally expect heading into the summer. The Christian Science Monitor explains some of the cyclical moves in seasonable pricing:

“Two critical specifications that need to be met for each gasoline blend are the octane rating and the Reid vapor pressure (RVP). Octane rating is important for avoiding engine knocking. But the octane rating for a gasoline blend is consistent throughout the year, and is not the reason for the seasonal price fluctuations.

The RVP spec, however, does change with the seasons and this change can have a major effect on the price of fuel. The RVP is based on a test that measures vapor pressure of the gasoline blend at 100 degrees F…

In the summer, when temperatures can exceed 100 degrees F in many locations, it is important that the RVP of gasoline be well below 14.7 psi. Otherwise, the fuel may build pressure in fuel tanks and gas cans, and it can boil off lighter components in open containers. Gas that is vaporized ends up in the atmosphere and contributes to air pollution.

Therefore, the Environmental Protection Agency (EPA) has declared that summer gasoline blends may not exceed 7.8 psi in some locations, and 9.0 psi in others.”

However, it is important to keep these things in context. In Illinois, gas prices were higher at the beginning of March than they ever have before. The Chicago Tribune reports:

“AAA said Monday that has prices in the state started at their highest point ever for March, with drivers paying an average of $3.92 per gallon.

The average price of gas has risen by 59 cents per gallon in Illinois since the beginning of the year, a record acceleration.

Beth Mosher, a spokeswoman for AAA Chicago, said the sharp spike is due to a decline in refinery production and downtimes for maintenance. Refineries often perform maintenance at this time of year as they transition to produce summer gasoline blends.

Those summer blends are to meet higher environmental standards during the year’s heavy drive times. They’re also more expensive than those blends produced in the winter, so AAA warns that the region won’t get relief from increasing prices any time soon.”

Filed under:Causes and Solutions,Energy,Fuel Cost Control,Fuel Price Trends | by Eyes on Energy @ 1:00 am |