CNNMoney had a couple of articles yesterday about oil prices finally hitting $100/bbl:
Friend of R-Squared, Doug MacIntyre, was quoted at length:
The Energy Information Administration, the Energy Department’s independent statistical and analysis arm, thinks strong demand and limited supply – otherwise knows as “the fundamentals” – is why oil is so pricey.
“Our view is that the market is tighter [than last year],” said Doug MacIntyre, senior oil market analyst at EIA. “We don’t have the inventories now.”
MacIntyre said inventories in developed countries – crude oil stored at refineries, or in tanks at ports, pipeline terminals and other locations – went from 150 million barrels above their five-year average at the start of the year to 10 million barrels below the five-year average now.
“That’s a big difference,” he said. “There’s less slack in the system than there was a year ago.”
Fadel Gheit disagrees, but I think Doug’s explanation is about 80% correct (but with some speculation involved):
Gheit said inventories are declining because high oil prices give people an incentive to sell crude now and wait until later to restock supplies, when hopefully oil is cheaper.
Other than the decline in supplies, Gheit says all the other factors EIA lists have been with us since last year, when oil traded at under $50 a barrel.
“It’s pure speculation,” he said. “What’s changed that we didn’t know in January? Not a single thing.”
Pure speculation? No. Some speculation, but mostly little swing capacity.
The second article talked about the potential impact of $100 oil:
NEW YORK (CNNMoney.com) — The rising price of oil is starting to bite – at the pump, the airline ticket counter and possibly in your home.
Oil hit $100 a barrel Wednesday and gasoline prices could soon top their all-time record from last May of $3.22 a gallon. Gas prices now average $3.05 a gallon nationwide, according to AAA. Many states have had gas over $3 for some time.
In the past few months, drivers have gotten off easy – gas prices hadn’t kept up with the increase in oil prices. The main reason: Demand has been fairly tame. But demand picked up during the holiday season.
At the same time, supplies of gas could get tight as many U.S. refiners are undergoing maintenance, according to Schork. And they stand ready to decrease production if gas prices don’t move higher, according to Kevin Norrish, a commodities analyst at Barclays in London. “The relative price of gasoline is low, and that’s unsustainable,” said Norrish.
As for next spring, when gas prices usually spike on anticipation of increased demand over the summer, Schork noted that in all likelihood we’ll be going into the season with much less in gasoline inventories than last year. “You’re that much closer to $4” a gallon gasoline, he said.
Personally, $4 a gallon gasoline looks very likely to me at these oil prices. It will be interesting to see if that price level finally moderates demand.