CAMARILLO, Calif. — While exports of Libyan crude oil have been decimated, suggesting to observers a supply threat that should spur prices, oil demand is under threat by the outbreak of coronavirus in China, suggesting oil prices may well crash.
After all, the role of Libyan crude in the world market once shot prices of Brent grade straight up years ago when Libya's former leader, Moammar Gadhafi, was toppled and killed. And analysts have long been ruminating about the potential of an economic slowdown in China sending world oil demand and prices plunging, and the new potential element in China's oil demand—the degree of demand destruction from the virus—cannot be known.
A week ago when war in Libya escalated to the blockading of its ports, West Texas Intermediate (WTI) near-month futures prices continued to drop. It was not in response to known demand loss from China, let alone the other five nations where occurrences have been found. Between Jan. 10 and Jan. 24, the WTI price retreated $4.85 per barrel to $54.19. Brent prices declined as well. The price gap between the two key benchmark grades has grown appreciably.
At the same time, the U.S. gasoline market is glutted. Stocks have reached their highest level ever; refiners are still cranking out the fruits of the lower-priced crude they've been acquiring, in the aggregate trimming the use rate of total national refining capacity by 2.5 points; and this is during the nadir month of the seasonal gasoline demand curve.
The U.S. average pump price of regular grade fell 4.03 cents per gallon (CPG) to $2.6044 in the past two weeks, according to the most recent Lundberg Survey of U.S. fuel markets. The standout promoters of low pump prices are the fabulous U.S. shale oil production and the awesome efficiency of the downstream. This includes the refining, marketing, distributing and retailing systems.
U.S. oil output has increased the nation's insularity at a time when five member nations of the Organization of the Petroleum Exporting Countries (OPEC)—Saudi Arabia, Iran, Iraq, Libya and Venezuela—just in the past few months have featured varying degrees of trouble in reduced or threatened abilities to supply oil to the world.
U.S. downstream gasoline margins are coping with the result of all that during the lowest demand month of the year, and overall demand growth that is shaky at best. Refiners did recover some gasoline margin in this period but it is still pallid. As for retailers, they are also coping with hourly wage boosts from this month's edicts in many states and other business cost increases, so the fact that the national average regular-grade margin edged up 0.32 CPG since Jan. 10 at such a time is a miniature coup.
Houston's average regular-grade retail margin is now, just as it was two weeks ago, at the extreme low end of margins around the country.
Houston's average retail price is at the extreme low end as well, as it was back on Jan. 10. But now both retail price and margin are even lower: average pump price is a nickel lower at $2.16 per gallon, and margin is 2.24 cents lower to a mere 13.19 CPG.
Unless world events create an oil price surge, retail gasoline prices will probably continue to slip.
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Trilby Lundberg is publisher of the Lundberg Survey of U.S. fuel markets.