Wednesday, December 28, 2011

Fuel prices driven by various factors

The phrase, “remember when”, has commonly been used all throughout history. As the speed of available information increases and the world continues to change, it is probably safe to say that “remember when” used to mean 20, 30 or 50 years ago. Today it can easily mean a year or less.

Many of us remember when the price of fuel changed a couple times a month (at most). We also remember when a change of 10 cents over a month’s time was a big deal. Back then we would have been shocked to know that the market could fluctuate more than 10 cents in a single day.  

So what is driving the change in price? According to Jason Creed, Director of Energy Operations for MKC, supply and demand is still driving the change in price just as it did years ago. Today, however, it’s happening on a much larger scale.

“Prices used to be determined by what the supply and demand picture looked like locally,” stated Creed. “Today, it has expanded to include the global scene.” While there are a number of things affecting today’s energy markets, Creed believes supply source, market spreads and diesel exports are making the biggest impact.

The United States produces 5.5 million barrels of crude oil while it consumes 14.7 million barrels per day resulting in the need to import crude oil. This imbalance has caused the U.S. to rely heavily on foreign sources for crude oil. Most people would be surprised to learn that OPEC is no longer the major source of oil for the U.S. but rather Canada, Mexico and Saudi Arabia are.

The two most heavily traded crude oil markets are West Texas Intermediate (WTI) and Brent. While these two markets typically trade close to the same value, the Libyan uprising and demand from China has caused Brent crude to trade at a substantial premium. “Refineries on the east coast who import Brent crude are experiencing poor margins or losses which have resulted in multiple refinery closings,” stated Creed. “These closings are creating an imbalance in supply and demand and therefore playing a role in prices.”

Product Exports
Exporting refined products such as diesel is also playing a role in pricing. The value of the dollar has allowed refiners on the gulf coast to export fuel to other countries for a greater profit compared to trading locally. According to Creed, exporting refined products has contributed to current inventory supplies of diesel to drop at a steady pace which in turn gives support to prices.

Will we ever see prices similar to those of 10 years ago? Probably not. One thing for certain, though, is the pace of information and the complexity of the global economy will not slow down.

“We’ve entered a new age,” said Creed. “And some day in the near future we will probably once again say, remember when.”

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