Crude and gasoline prices

With crude prices at over $115 per barrel and gasoline in the US at near record levels, it is hardly surprising that yet again the International Energy Agency (IEA) is calling on OPEC to increase production and that US Senators are asking the US antitrust regulator to investigate. What these people seem to forget, or perhaps do not appreciate, is that crude is not homogeneous and that a refiner cannot use all grades of crudes and produce more than just gasoline. The international crude markets have lost approximately 1.4 million barrel per day (b/d) of light sweet crude due to the fighting in Libya. Whilst Saudi Arabia has replaced this lost production on a volume basis, this extra crude has twice and in some cases three times the sulphur content than that of the lost Libyan production. Refineries, especially less complex ones in Europe, cannot handle this extra sulphur and therefore have the choice of chasing reduced light sweet production, and therefore pushing up the price, or reducing throughputs. Should refineries choose to run heavier types of crude they can actually produce less gasoline, but more of the heavier, less valuable, products. Product where there is no increase in demand reducing their margins, if not turning them negative. Even with some sour crudes trading at their largest discounts to the Brent benchmark for two and half years the economics do not stack up for some refiners. European refinery throughputs are down nearly 500,000 b/d compared with last year. And let’s not forget that most of the US gasoline problem is of their own making, they have as many as 50 different grades of gasoline throughout the year – winter/summer and from state to state, the tax on gasoline is extremely low, so there is no incentive for efficient use and to reduce consumption and no new refinery has been built in the US for something like 30 years. The only surprise is, not that we have high prices, but that politicians continue to make demands that have no basis in fact – or is it!

Posted in Commodity Markets, Energy Markets