But Not Crude Oil Prices

"Muted" price reaction to Gulf Coast slick could change if domestic supply is limited

Samantha Oller, Senior Editor/Fuels, CSP

OMAHA, Neb. -- While the recent rig collapseand subsequent oil spillin the Gulf of Mexico has become a growing environmental and economic catastrophe for that region, with more than 4 million gallons of oil spreading in the water and just now hitting the Alabama shoreline, it has not impacted crude-oil pricesyet.

The reason? As Brian Milne, refined fuels editor for Telvent DTN explained during an Energy Trading Market Outlook for Hydrocarbon Commodities Web seminar this week, it's all about the country's current supply surplus.

"If we had a tight supply situation [image-nocss] and then we had this spill, you certainly would have watched crude prices spike," said Milne. "But the reason they're not is because we still have relatively lackluster demand overall and just plenty of supply to handle it, so we've had a muted response as a result."

The price for crude-oil futures dropped below $75 a barrel this week, a three-month low, thanks largely to a stronger dollar and a weaker Euro.

While the domestic crude supply is decreasing, it remains well above the 5-year average, said Milne. A combination of high unemployment and a behavioral change among U.S. consumers, who are driving less and buying more fuel-efficient vehicles, has kept demand low and stockpiles high. Imports are also holding below the 5-year average because of this ample supply.

The situation can change, however, if the Gulf oil slick continues to grow unabated and begins threatening imports, which will only increase pressure on domestic supply.

"If they're able to contain this spill, it'll have a less of an impact on prices because we'll get back to normal markets, and then we'll start waiting for regulations to have an effect," said Milne, predicting a federal regulatory crackdown in the wake of the spill. "If it starts spreading, and it starts interrupting shipping lanes, then you're going to start denying imports from coming into the U.S. Then we'll start seeing some of that excess supply and inventory being drawn down. As a result, you'll start seeing the front end of the curve finding support for crude and pushing prices higher."

One area to watch in particular is the Louisiana Offshore Oil Port, or LOOP, which accepts roughly 1 million barrels per day of crude, or 13% of the country's imports; from there, it's piped to refineries on shore. As of late this week, Reuters reported that the oil slick had not yet affected the deepwater port.

"If that's impacted and LOOP needs to shut down, that would have a bigger impact on refiners in the Midwest area, especially because of where the pipe[line] system goes," said Milne. "Also, the concern is you can't have ships traveling through the oil slick because it obviously will spread it, and not just by disrupting cleanup efforts, but it attaches to the [ship's] hull."

If shipping lanes are cut off, coastal refineries' crude supply could also be pressured. That same Reuters report noted that the oil slick is forecasted to move west, possibly toward shipping channels near central Louisiana's coast.

Beyond the slick, traditional factors are expected to pressure crude-oil prices upward in the months ahead. If the rest of the year plays out as expected, Milne predicted this number could inch up toward the $90-per-barrel mark by the end of the year, as economic recovery heats up demand forecasts.

"It's a tough resistance number, but I think we will test it and maybe go higher," said Milne. "What's driving it is economic growth. We watched supply build, then get data supporting that the economy is growingthat trumps supply build. It continues to be about expectations: What's expected for fuel demand going forward as opposed to where it is currently."