There was a time when data issued by the U.S. Energy Information Administration had tremendous influence on crude, gasoline and diesel prices.
But an Ontario analyst says analyzing weekly reports on crude oil and fuel inventories is now a waste of time because the market for crude, gasoline and diesel is illogical.
“We have an absolute glut of supply.… Nothing is making any sense whatsoever. There’s no reason why crude should be at $91 or $92 (per barrel),” said Roger McKnight of En-Pro International, a consulting firm in Oshawa, Ont., that provides pricing and procurement advice.
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“Myself and the rest of the analysts … we take a look at that inventory report and basically throw it out. It used to be that it was a sacred document … but in the last six to nine months to a year, everybody has thrown it out because it’s got nothing to do with it (price).”
For example, the U.S. Energy Information Administration reported that U.S. crude oil inventories were 331 million barrels in early January, well above average for the first weeks of the year.
The distillate, or diesel and heating oil inventory, had risen to 164.8 million barrels, which is also substantially higher than average for early January.
In spite of ample supply and economic woes curtailing demand in the United States and Europe, the price of crude is pushing past $90 per barrel, McKnight said.
The disconnect between market fundamentals and price may be disturbing, but McKnight did have an explanation for the rise in oil prices.
Crude prices are now inversely related to the value of the U.S. dollar, he said. If the dollar goes up, crude goes down. When the dollar drops, crude rises.
He said speculative investors who hold foreign exchange, commodity and equity portfolios are driving this phenomenon.
“When commodities look like they are overheated, they (speculators) go into the U.S. dollar, which drives the dollar up and drives the price of crude down,” said McKnight, who has 30 years of experience in the oil industry.
“Then the opposite happens…. It goes back and forth, back and forth every hour. It’s crazy.”
Diesel prices have also climbed in the past year. For instance, the price at the pump in Brandon had risen to almost $1.09 per litre Jan. 11 from 93.2 cents per litre last January.
“(In Western Canada), for every dollar increase in a barrel of crude, it works out to about six tenths of a cent at the price at the pump,” McKnight said.
He’s also suspicious about the difference between crude and diesel prices, known as the crack spread.
“When I look at the western (Canadian) prices, I’m quite astounded at the refining margin … the difference between the cost of crude and the rack price. It’s about 50 percent higher than it was at this time last year,” he said.
“There’s something funny going on and I can’t understand it.”
Not every energy analyst has tossed aside supply and demand data.
Spencer Knipping, petroleum adviser with Ontario’s energy ministry, said diesel prices are rising because demand for the fuel increased substantially in Canada in 2010.
“The retail price of diesel is at a 27 month high in Ontario,” he said, noting diesel was selling in Toronto Jan. 11 at $1.17 per litre.
Based on Statistics Canada data, diesel consumption was up 12.7 percent across the country for the first eight months of 2010, compared to the same period in 2009.
Knipping said demand for diesel depends on the health of the economy.
If more raw materials are extracted and more goods are manufactured, then more trucks and trains are needed to move those products.
As well, demand for diesel is growing at a faster rate than gasoline demand in North America.
Government mandates have increased the amount of ethanol burned in North American vehicles and more consumers are switching to fuel-efficient cars.
Looking ahead, Knipping expects diesel prices will remain higher than gasoline.
The U.S. Energy Information Administration predicts crude will average $93 per barrel in 2011, while McKnight expects oil prices to top $100 per barrel late this winter but quickly retreat to the $88 to $95 range.
“It will recede back down … because the North American economy and the European economy, in general, cannot tolerate $100 a barrel crude. It will put us back into the recession.”
