WASHINGTON – U.S. demand for oil and refined products – including gasoline – is down sharply from last year, so much that the United States has actually become a net exporter of gasoline, unable to consume all that it makes.
Yet oil and gasoline prices are surging.
On Tuesday, oil rose past $105 a barrel and gasoline averaged $3.57 a gallon – thanks again in no small part to rampant financial speculation on top of fears of supply disruptions.
The ostensible reason for the climb of crude prices on the New York Mercantile Exchange, where contracts for future delivery of oil are traded, is growing fear of a military confrontation with Iran in the Persian Gulf’s Strait of Hormuz, through which 20 percent of the world’s oil passes.
Other factors driving up prices include last month’s bankruptcy of Petroplus, a big European refiner, and a recent BP refinery fire in Washington state that has temporarily crimped gasoline supply along the West Coast; gas now costs an average of $4.04 a gallon in California.
While tension over Iran has ratcheted up in the past few months, the price of oil and gasoline has leapt far beyond conventional supply-and-demand variables. Financial speculators are piling into the market, torquing the Iranian fear factor into ever-higher prices.
“Speculation is now part of the DNA of oil prices. You cannot separate the two anymore. There is no demarcation,” said Fadel Gheit, a 30-year veteran of energy markets and an analyst at Oppenheimer & Co. “I still remain convinced oil prices are inflated.”
Consider that light, sweet crude trading on the NYMEX changed hands at $79.20 a barrel just four months ago but soared past $105 a barrel Tuesday, partly on news that Iran would halt shipment of oil to Britain and France. But those countries already had stopped buying Iranian oil. And Didier Houssin, the International Energy Agency’s director for energy markets and security, said “there are alternative supplies that can make up for any loss of Iranian exports,” the Wall Street Journal reported.
Still, oil’s price shot up because it trades in financial markets, where Wall Street firms and other big financial players dominate oil trading, even though they have no intention of ever taking possession of the oil whose contracts they are trading.
Since oil prices are the biggest component in the price of gasoline, pump prices are soaring. AAA said Tuesday that the nationwide average price for a gallon of gasoline stood at $3.57, compared with $3.38 a month ago and $3.17 a year ago. It takes about $6 more to fill up the tank than it did this time last year – and last year’s gasoline-price surge helped take the steam out of the economic recovery.
Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it’s almost the reverse.
A McClatchy Newspapers review of the latest Commitment of Traders report from the Commodity Futures Trading Commission, which regulates oil trading, shows producers and merchants made up just 36 percent of all contracts traded in the week ending Feb. 14.
Not surprisingly, big Wall Street traders on Tuesday projected oil will rise above $112 a barrel; some such as Swiss giant Vitol even suggested $150-a-barrel oil is coming soon. When they dominate the market, speculators’ bids can make their prophecies self-fulfilling.
“These people are not there to be heroes. They are there to make money. It’s our fault because we are allowing them to do that,” Gheit said. “Obviously these people are very strong, and the financial lobby is the strongest of any single lobby.”
What’s indisputable is that oil and gasoline are not in short supply, and that demand remains weak. That was clear in the latest weekly energy market update by the U.S. Energy Information Administration – published last week for the week ending Feb. 10.
“Total products supplied over the last four-week period have averaged 18.3 million barrels per day, down by 4.6 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 8.1 million barrels per day, down by 6.4 percent from the same period last year,” said the EIA, the Energy Department’s statistical arm.
Inventories of stored oil are also unusually high, the EIA said.
Hence, no shortage to explain soaring prices.
In fact, U.S. demand and consumption patterns are so abnormal compared to recent decades that oil and gasoline are both now being exported to Europe, Asia and Latin America.
Exports of U.S.-refined product averaged 2.93 million barrels per day over the four weeks ending on Feb. 10, compared to 2.19 million barrels per day for the four weeks ending Feb. 11, 2011, the EIA said.
Similarly, the United States did not export any oil in the four weeks ending Feb. 11, 2011, but in the four-week period ending this Feb. 10, the nation exported 37,000 barrels.
The export picture suggests that when domestic demand rises, American motorists might be competing with drivers elsewhere for U.S.-made gasoline, which fetches a higher price as an export.
“To the extent that there is this export market that wasn’t there before, it is certainly … keeping prices higher than they otherwise would be,” said John Kilduff, a veteran energy analyst at AgainCapital in New York.
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