“Give Me Some of that Sweet,Sweet Crude!”
Sometimes we talk quantity and sometimes we talk quality. Last week Saudi Arabia tried to calm the oil markets by trying to make crude oil available because of the ongoing war in Libya, not to mention unrest in the rest of the region. They contacted European refiners to let them know that the Kingdom would graciously consider their request for oil. Nice guys right?
The problem of course is that most of those European refiners turned down the Saudis offer mainly because they lacked the ability to refine the Saudi sour crude. So, it was not a surprise when reports that Kuwait, the United Arab Emirates and Nigeria might make their higher quality crude available in extra quantities and the market reacted.
Oh sure, oil prices broke a bit, but the promise of some higher quality crude for Europe really reeled in the Brent crude/WTI spread that had widened at one point to over a $20 a barrel premium over Brent. This spread had really been blown out of whack as North Sea production faltered and tension in the region lead to fears of tight supply of higher quality crude leaving European refiners scrambling because of the regional issues. Yet despite the dutiful break in oil, the market failed to follow through because the risk is not just to Europe but to the world in general.
Violence in Libya continues and tensions are red hot in Algeria, Bahrain, Iran, Kuwait, Yemen, Egypt, Jordan and the market's greatest fear, Saudi Arabia. Even the Energy Information Agency had to acknowledge the increasing risk to supply in its recent Short Term Energy Outlook.
The EIA said that, "WTI and other crude oil spot prices have risen about $15 per barrel since mid-February partly in response to the disruption of crude oil exports from Libya. Continuing unrest in Libya as well as other North African and Middle Eastern countries has led to the highest crude oil prices since 2008. As a result, EIA has raised its forecast for the average cost of crude oil to refiners to $105 per barrel in 2011, $14 higher than in the previous outlook. However, EIA has raised its 2011 forecast for WTI by only $9 per barrel to $102 per barrel because of the projected continued price discount for this type of crude compared with other crudes."
The EIA also had a stark warning on gas prices. They said, "The recent rapid increase in spot crude and gasoline prices has led to a significant rise in retail product prices. Motorists currently experiencing a jump in pump prices will likely see further increases from now through the spring since the recent increase in crude oil prices has not yet been fully passed through to gasoline prices. EIA expects the retail price of regular-grade motor gasoline to average $3.56 per gallon in 2011, 77 cents per gallon higher than the 2010 average and about 40 cents above the projected price in the previous Outlook. EIA projects gasoline prices to average about $3.70 per gallon during the peak driving season (April through September) with considerable regional and local variation. There is also significant uncertainty surrounding the forecast, with the current market prices of futures and options contracts for gasoline suggesting a 25-percent probability that the national monthly average retail price for regular gasoline could exceed $4.00 per gallon during summer 2011. Rising crude oil prices are the primary reason for higher retail prices, but higher refining margins are also expected to be a contributing factor."
Still the stock market liked the break in oil and the momentary stability it brought. Stock traders at this point do not really care what the price of oil is, but just that it's steady. Sharply rising prices hurt but if they stabilize at higher levels, the odds of the Fed raising interest rates decreases dramatically.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.