The Giant Middle East Wild Card

A gasoline price increase is upon us
Photograph: Shutterstock

CAMARILLO, Calif. — There is every reason to expect an almost immediate gasoline price increase, maybe a historic one. The only question is will it be pretty big, very big or a monster spike?   

The Sept. 14 attacks on Saudi Arabia's oil facilities have halved that country's output, turning what was a moderate risk premium built into world oil prices into a giant wild card—because the severity and duration of damage from the drone attacks is being assessed and reassessed by the minute. As the European futures market opens and the first inkling of oil market response informs globally, the oil price will be then corrected up or down repeatedly as multiple volleys of incoming news hit world perception.

Although geopolitical oil supply risk was already among the ingredients that determine the price of a barrel of crude, its Middle East role in the mix just got far larger. The potential influence upon the oil price from the existence of, and release of oil from, countries' oil reserves including the U.S. Strategic Petroleum Reserve is likewise already built in and just got bigger.

As with so many other oil price factors that already exist, the newness comes from the ever-changing weights that each has inside the price. The various oil futures markets will display the "consensus" about those weights, and do so continuously.

Despite a small degree of insulation of the U.S. oil and gasoline markets from world market battering, refiners, marketers and consumers globally will be affected by the attacks on Saudi Arabia. In the case of the United States, the surplus of both domestic oil production and refineries' gasoline production will play roles, as will lower-cost winter blend gasoline now allowable in much of the nation. Those are two factors that will make any U.S. gasoline price spike a bit less severe than it otherwise would be. It may be that the short-term U.S. pump price increase resulting from the crippling of half of Saudi Arabia's output is a nickel, five times that or more.

It would take a 28-cent-per-gallon (CPG) retail gasoline price increase to rescind the current discount that motorists pay on average under the price they paid one year ago.

Meanwhile, each of the two U.S. downstream industry sectors—refiners and retailers—forfeited some gasoline margin in these three weeks.

Crude-oil prices did not crash; in fact, West Texas Intermediate (WTI) rose a diminutive amount, but the retail price fell anyway by 2.95 CPG to $2.6307, according to the most recent Lundberg survey of U.S. fuel markets.

Nationally the pump price has dropped 20.14 cents over the past 10 weeks. Retail gasoline margin just lost 2.06 cents, and it has lost nearly 11 cents since Aug. 9. Regular-grade retail margin is now 21.92 CPG.

While the drone strikes have for now taken out half the capacity of the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), their petroleum market effects will include not just the prices of oil and all refined petroleum, but business margins as well. Price and margin changes may soon exhibit bigger and more volatile changes than usual. A U.S. gasoline retailer's margin gains and losses will result in part from the world's perceptions of recovery time from the attacks on Saudi oil facilities, and on decisions made by countries and companies to deal with the consequences.

Camarillo, Calif.-based Lundberg Survey Inc. is an independent market research company specializing in the U.S. petroleum marketing and related industries.

Click here for previous Lundberg Survey reports in CSP Daily News.




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