Summary
Crude Prices are up approximately 30% this year. Product prices, especially diesel fuel have soared as well. Prices could decline for many reasons: A stronger dollar forcing some speculators out of a short dollar long commodity position, significant declines in demand (or declines in the rate of demand growth) due to a rapidly deteriorating economy, or declines in demand due to the lifting of fuel subsidies around the world.
Analysis
All other things being equal, i.e. production rates, violence in Nigeria etc, crude oil and petroleum markets will fall in reaction to declines in demand. The world demand could be divided into two segments: Consumers who pay the market price for their petroleum products and consumers who pay a less than market price due to price controls or state subsidies.
In the USA, where the consumer pays the market price, we are already seeing demand destruction due to high prices. In Califronia, year on year gasoline sales in January were down 4.5%, the February data ought to be out this week. Nationally in February, gasoline demand was down 2%. It appear that the recent run up in prices is causing demand destruction on the order of 4-5%.
Jet fuel demand in the USA is declining as airlines pare back flight schedules and diesel demand is slowing as the economy slows down as well. Diesel exports continue at a robust level due to price controls and subsidies overseas. However, we are beginning to see an end to those subsidies.
The rising cost of fuel and food is strapping government budgets. Food subsidies are likely to last loner than fuel subsidies. As fuel subsidies decline and the street price goes up, it is anticipated that the rate of demand growth declines and perhaps even year on year growth in some countries is flat or negative.
Indonesia is raising fuel prices 30% effective May 23. Sri Lanka increase 14-47% effective May 25. CPC in Taiwan prices up 10% effective May 28. Bangaldesh proposed an increase of roughly 40-80%. Malaysia considerring a 20% rise later this year. It's election year in India, fuels subsidies are not likely to be changed until after the election. For China demand, there is a school of thought that after the Olymics in August, domestic prices will be allowed to rise. It appears that there is already a slowdown in crude oil purchases by Chinese Refiners. Crude oil for loading in West Africa is trading for July loadings which are August arrivals in China.
The start up of the Reliance Jamnagar refinery will add significant amount of products and the first tranche of gasoline, about 100,000 barrels per day is believed headed for the USA in August/September. Combine that with lower USA gasoline demand and higher use of ethanol and pressure will appear on the gasoline crack. Continued price controls in India will result in Jamnagar being totally export oriented.
Recently the 3:2:1 refining crack on the US Gulf Coast has significantly deteriorated in 2009 and 2010 to be of little help to some refiners earnings: big oil or independent refiner. DEpends what crude they process and what the product slate is.
As price controls and subsidies are phased out, the consumer will be faced with higher prices and it is expected that demand, or at least the rate of growth in demand will decline. A significant slowdown in the world economy will only exacerbate the situation. Could we get to $100/barrel? Its not difficult to imagine. $80? With the Dow at 9000 we could. $50? Unlikely.
