$150 Oil, $5 Gasoline This Summer?

Jim Brown
 
Printer Friendly Version

That is what some analysts are now predicting. They are blaming the loss of oil production from Libya and the potential explosion of tensions in Yemen and the rest of the Middle East. More than 27% of the world's oil comes from the MENA nations.

Phil Flynn, and oil industry analyst with Chicago based PFGBest, claims the situation in Libya and problems in Yemen could seriously impact future oil prices.

Every day we read of some new problem in Yemen and it does not appear to be getting better. Yemen only produces about 290,000 bpd and most of that is exported but it is also a critical transfer point for global oil supplies. If civil unrest were to turn into civil disobedience we could see another significant drop in available oil.

Yemen's president Ali Abdullah Saleh initially agreed not to run for office again in 2013. That suggestion was defeated. He then said he would leave at the end of 2011. That was also rejected by the people. Protestors by the tens of thousands are showing up daily and now a major military general and 18 other government leaders have defected to the side of the protestors. In response Saleh has fired his cabinet and imposed martial law. Eventually he will get the hint that leaving office is the easy way out. Unfortunately, like Gaddafi, the financial benefits of power in an Arab country are a seriously addictive force.

Flynn said prices in Chicago would likely accelerate faster than other parts of the country because summer fuel blends are more expensive and taxes are higher. He expects $5 gas this summer.

Another analyst, Bon van der Valk, with 4Refuel Inc, a Canadian fuel management firm, expects $5 gas by Labor Day. He is factoring in Libya's drop in production and the increase in demand in Japan as well as the MENA tensions as the perfect storm for oil prices.

The average price for gasoline in Chicago was $3.75 on Wednesday. That is 69-cents higher than last year at this time and 38-cents higher than last month. According to Gasbuddy.com it is already over $4 at some Chicago stations.

Van der Valk noted crude prices have risen about $6 from the prior week's dip. For every $1 increase in oil prices the price of gasoline rises by about 2.5 cents.

The airlines are getting hammered. United and Continental are raising fares on U.S. routes by $10 and that is the seventh fare hike so far this year. Delta is cutting capacity by -2% and canceling plans to add routes later this year. Delta is expected to lose $400 million in profits due to loss of flights to Japan.

Iraq's Oil Minister said, "Global oil prices are moving towards $120 a barrel. We consider this an acceptable price that will not harm global growth. We think the price will not exceed $120 per barrel." He said OPEC would probably schedule an meeting to discuss production quotas if oil prices moved over $120.

It was not long ago that Saudi was claiming $85 as a fair price for oil. Don't you find it amazing that every new price suddenly becomes a "fair price" for oil? This is their way of trying to calm global consumers by desensitizing them to the price in piecemeal fashion. The next sound bite out of an OPEC member will be blaming the high prices on "speculators."

I agree there is a $10 security premium built into today's price BUT the real problem is still the shortage of light, sweet crude. Libya is not producing it and now Japan is consuming an extra 200,000 bpd. China and India have exploding auto sales and demand growth for 2011 could be nearly as high as 2010. Only light sweet production is not keeping up with that demand. We have reached "Peak Sweet™" and the problem is not going away any time soon.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions

The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?

Archives:200920102011201220132014201520162017