National Petroleum News (NPN) has been the independent voice of the petroleum industry since 1909 as the opposition to Rockefeller’s Standard Oil. So, motor fuels marketing and retail is not just a sideline for us, it’s our core competency.
Issue link: https://read.dmtmag.com/i/25410
As domestic demand increases refining capacity will become tighter and margins will increase and this will undoubtedly nudge gasoline and diesel prices slightly higher and increase the likelihood of some of the more traditional volatility impacts relative to disruption. Even in the current economy this traditional factor has come into play. Seasonal refinery switchover and maintenance cycles still improve prices (though sometimes the downward adjust- ment has lagged of late). And Milne noted that the market moved up when the St. Croix refinery in Hovensa was down for repairs and the market moved up on that with addition- al impact from Conoco Phillips New Jersey refinery mainte- nance and a Canada refinery shut for maintenance that trig- gered an inventory drawdown and prices moved up. With specific products, such as distillates, fairly recent changes in the marketplace can be expected to have a notable, national impact. “One thing that is important to note is that there really is little difference anymore between heating oil and other dis- tillates, specifically diesel,” said John Kingston, Platts global director of news. “They’ve all pretty much gone to lower sulfur. I’ve always felt that the higher sulfur level did give some sort of a safety valve. If you had a bone chilling win- ter and you have some sort of supply problem you can always bring in very high sulfur stuff from Europe and other areas of the world. That is not going to be available any- more. There is always the possibility that the government is going to grant a waiver but these markets tend to react very quickly, so you fuel the spike in heating oil you can imagine rather quickly some trader going and buying high sulfur stuff and immediately selling about one month into the Nymex and delivering against it. That’s not going to be available anymore.” Kingston noted another concern relative to low sulfur diesel as prices fell is that refineries might delay the con- struction of hydrotreaters, which are used to de-sulfur diesel. “We’ve been O.K. now because we have plenty of spare capacity, but if there’s going to be a strain on the system over the next couple years. I think you’ll probably see it in the diesel market,” he said. “Will that capacity—that was so strained back in 2008—be strained again? There was always some feeling that some of the strain came from just transi- tioning to lower sulfur diesel levels in Europe and that maybe the market has kind of gone through that transition. Time is going to have to play out.” Finally, the impact of political uncertainties in the Middle East, such as the recent turmoil in Egypt and potential con- frontations with Iran, as well as in other oil-producing coun- tries, will continue to play a significant and fairly traditional role in driving the markets relative to supply concerns. www.npnweb.com NPN Magazine THE PRICE OF THE DOLLAR The U.S. dollar is used (at least for now) as the currency for the world’s oil market. Therefore, when the price of the dol- lar is strong the price of oil, and therefore refined products, to the U.S. consumer tend to be lower. “Right now we’ve been seeing the dollar strengthen recently, but we saw the dollar moved sharply lower and that pushed up your domes- tic prices,”said Milne.“And not only that, but when you have a weakening currency your investors will look to assets that will hold or gain value over time. So if you think you can hold it in dollars and the dollar is going to weaken that is not good.You want something that will preserve that cash, actu- ally make money on it, and commodities were seen as a good way of doing that.” The latter issue noted by Milne will be discussed in greater detail in part two of this article. The value of the dollar can also have some global demand- related impacts.“The relationship between the value of the dol- lar and oil prices is very complex,” said EIA’s Lidderdale.“There is the fundamental theory that as the value of the dollar declines, relative to the Euro, oil essentially becomes cheaper in Europe because they are buying it in dollars and selling it in Euros.And because the price is lower,demand goes up in Europe and there- fore the price has to globally increase to restrain demand else- where and maintain a balance.” Lidderdale noted that the estimated impact of this demand factor is relatively small. He also outlined how U.S. domestic economic policy has impacted the price of oil from a demand standpoint. “As the U.S. economy is stimulated through monetary policy, because China maintains a rela- tively fixed exchange rate with the United States that stimu- lus is transmitted overseas,” he said. “A stimulus to the U.S. economy is also a stimulus to the Chinese economy and that growth in demand translates into a growth in crude oil demand, which pushes oil prices up.And the rise in oil prices for other reasons can affect the value of the dollar as it effects a change in relative asset valuation between oil-producing economies and oil consuming economies. So over the long run there is definitely a relationship between the value of oil and the value of the dollar.” This wraps up the case generally presented by the invest- ment banks, some mainstream economic and political pun- dits and to some extent the EIA that significant global sup- ply and demand factors primarily drive current oil prices and the resulting prices of refined products. In part two we will present the case that these factors, even should they be accurate long-term assessments of the market dynamics, cannot account for the extraordinary increases in oil prices since roughly 2005. While much has changed in the world relative to the physical product, similar and extraordinary changes have occurred relative to the players in the futures markets and the rules under which they operate. JANUARY/FEBRUARY 2011 17