The Brent vs. West Texas Intermediate spread favored Brent by the biggest margin since December as the saga of reduced pipeline runs through the Seaway will back up oil in Cushing Oklahoma once again. West Texas Intermediate pulled back and helped anchor products that have gone on an incredible run. Oil, which has been supported by a weak dollar, economic optimism, better data out of China and the promise that we will get more stimuli, has been driven to incredible heights. But the party may be ending as worries about Europe are easing and talks with Iran are taking away threats of immediate disruption threats.
Gas prices of course have been all the rage as the Energy Information Agency reported that gas prices rose by 18.1 cents last week putting them 56 cents higher than a year ago. This has been the largest run-up in gasoline prices in 3 1/2 years. This has been caused by a multitude of factors from refinery shutdowns and soaring crude costs. We saw a squeeze play as supply in New York Harbor fell 10% below normal as a cold winter in Europe slowed gasoline cargoes. In the Midwest a refinery fire at PBF Energy Inc.’s Toledo refinery in Ohio shut the fluid catalytic cracker, cut rates at some process units and placed others on “standby” after a fire. This comes as China oil demand surged to the highest level in almost two years rising 10% from a year earlier.
The EIA also reported that U.S. gasoline expenditures in 2012 for the average U.S. household reached $2,912, just less than 4% of income before taxes. This was the highest percentage of household income spent on gasoline in the last decade, with the exception of 2008. These expenditures as a percentage of household income are still low when compared to the early 1980s, when the estimated portion of household income spent on gasoline surpassed 5%.
Source: U.S. Energy Information Administration estimates
Natural Gas is putting in a long term bottom but look out in the future. Look to put on bullish strategies as far out as you can go in the options as natural gas demand is soaring. Record high demand is being inspired by low prices, and while we have an oversupply in the short term the long term looks like there is a lot more upside than downside. If natural gas prices have steadied because demand growth seems to be catching up with production growth, even the increasing cost of production should give us a target of at least $7.00 in a couple of years.