Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
Global oil prices are down $5 bbl from early June as the market retraces a spike in value to a nine-month high triggered by concern over supply disruptions in Iraq by a Sunni militant group, with the market erasing the geopolitical premium caused by the threat.
The market rallied as militants with the Islamic State of Iraq in the Levant marched through Iraq, capturing major cities and territory in the northern and western parts of the country. Their quick march through Iraq stopped in front of Baghdad, with the southern part of the country, where roughly 90% of Iraq’s oil production and its major export terminal are located, believed to be adequately protected. The containment of ISIS has greatly reduced the risk of supply disruptions in Iraq.
Moreover, Iraq officials aim to increase Iraq production in the south this month, with the country’s production averaging 3.1 million bpd, while the Organization of the Petroleum Exporting Countries lifted their output rate in June. Agreement with Libya’s government and rebels to open two export ports that have been closed by the rebels on-and-off for roughly a year is expected to prompt a ramp up in production by the OPEC member country to 500,000 bpd near term from roughly 200,000 bpd, adding to the price pressure in global oil prices. The lost Libyan production, with as much as 1.6 million bpd shut-in because of the closed export terminals and internal struggle, has been a primary factor in holding domestic oil prices over $100 bbl.
New York Mercantile Exchange WTI crude futures, which represent US crude values, punched below $104 bbl to a nearly one-month low, down about $4 bbl from its June high. The Brent crude contract traded on the ICE platform, is down $5 bbl from its June high to the mid $110 bbl. Brent crude represents the global oil price. Technical factors suggest more downside for crude futures.
US gasoline and diesel prices closely track the Brent contract, with gasoline futures on NYMEX, called the Reformulated Blendstock for Oxygenate Blending contract, down 15cts from an 11-month high at $3.1520 gallon reached June 23. The contract is poised to break below $3 gallon for the first time since June 11.
Hurricane Arthur slammed the Outer Banks of North Carolina as a Category 2 storm on July 4, and a day later caused flash flooding in southeast Massachusetts. Hurricane Arthur likely dampened travel demand to some extent over the July 4th holiday weekend, although the quick moving storm missed large parts of the Eastern Seaboard.
Retail gasoline prices were at six-year highs for the July 4th weekend, although holiday driving demand was expected to reach a seven-year high of 34.8 million Americans traveling 50 miles or more from their home by automobile by AAA Travel.
Gasoline supplied to the primary market surged 355,000 bpd to 9.168 million bpd during the week-ended June 27, although the implied demand rate was down 126,000 bpd from year prior. Implied gasoline demand at 8.703 million bpd for the first six months of 2014 averaged 137,000 bpd or 1.6% more than a year ago, although only 47,000 bpd or 0.5% more in June versus June 2013 at 8.966 million bpd.
Slowing gasoline demand against a year ago suggests high retail prices in June could have dented the consumption rate.