WASHINGTON - U.S. demand for oil and refined products - including gasoline - is down sharply from last year, so much that United States has actually become a net exporter of gasoline, unable to consume all that it makes.
Yet oil and gasoline prices are surging.
On Tuesday, oil rose past $105 a barrel and gasoline averaged $3.57 a gallon - thanks again in no small part to rampant financial speculation on top of fears of supply disruptions.
The ostensible reason for the climb of crude prices on the New York Mercantile Exchange, where contracts for future delivery of oil are traded, is growing fear of a military confrontation with Iran in the Persian Gulf's Strait of Hormuz, through which 20 percent of the world's oil passes.
Other factors driving up prices include last month's bankruptcy of Petroplus, a big European refiner, and a recent BP refinery fire in Washington state that's temporarily crimped gasoline supply along the West Coast; gas now costs an average of $4.04 a gallon in California.
While tension over Iran has ratcheted up in the past few months, the price of oil and gasoline has leaped far beyond conventional supply and demand variables. Financial speculators are piling into the market, torquing the Iranian fear factor into ever-higher prices.
"Speculation is now part of the DNA of oil prices. You cannot separate the two anymore. There is no demarcation," said Fadel Gheit, a 30-year veteran of energy markets and an analyst at Oppenheimer & Co. "I still remain convinced oil prices are inflated."
Consider that light, sweet crude trading on the NYMEX changed hands at $79.20 a barrel just four months ago, but soared past $105 a barrel Tuesday afternoon, partly on news that Iran would halt shipment of oil to Britain and France. But those countries already had stopped buying Iranian oil. And Didier Houssin, the International Energy Agency's director for energy markets and security, said that "there are alternative supplies that can make up for any loss of Iranian exports," The Wall Street Journal reported.
Still, oil's price shot up because it trades in financial markets, where Wall Street firms and other big financial players dominate the trading of oil, even though they have no intention of ever taking possession of the oil whose contracts they are trading.
Since oil prices are the biggest component in the price of gasoline, pump prices are soaring. AAA said Tuesday that the nationwide average price for a gallon of gasoline stood at $3.57, compared with $3.38 a month ago and $3.17 a year ago. It takes about $6 more to fill up the tank than it did this time last year _ and last year's gasoline-price surge helped take the steam out of the economic recovery.
Defining what percentage of today's high oil and gasoline prices is due to excessive speculation, driven by Iran fears, is something of a guessing game.
"I put the Iran security premium at about $8 to $10 (a barrel) at this point, which still puts crude at about $90 or $95," said John Kilduff, a veteran energy analyst at AgainCapital in New York.
The fear premium is the froth above what prices would be absent fears of a supply disruption _ somewhere in the $80 to $85 range for a barrel of crude oil. It means that even with the extra cost put on oil from Iran fears, prices are at least another $10 higher than what demand fundamentals would dictate.
Why? Financial speculators.
What should the price of oil be if left to conventional supply and demand market fundamentals? Canada's the largest supplier of imported oil to the United States, which now actually produces more than half of the oil it consumes. Production and delivery costs for a barrel of oil from Canada are about $75 a barrel. The market-fundamentals cost for a barrel of oil is in that ballpark; above that, speculation sets the prices.
"It's as simple as that," said Gheit, who has testified before Congress and called for regulatory limits on speculation in commodities markets.
Historically, financial speculators accounted for about 30 percent of oil trading in commodity markets, while producers and end users made up about 70 percent. Today it's almost the reverse.
A McClatchy Newspapers review of the latest Commitment of Traders report from the Commodity Futures Trading Commission, which regulates oil trading, shows that producers and merchants made up just 36 percent of all contracts traded in the week ending Feb. 14.
That same week, open interest, or the total outstanding oil contracts for next-month delivery of 1,000 barrels of oil (about 42,000 gallons), stood above 1.486 million, near an all-time high. Speculators who will never take delivery of oil made up 64 percent of the market.
Not surprisingly, big Wall Street traders on Tuesday projected oil will rise above $112 a barrel; some such as Swiss giant Vitol even suggested $150-a-barrel oil is coming soon. When they dominate the market, as they do, speculators' bids can make their prophecies self-fulfilling.
"These people are not there to be heroes. They are there to make money. It's our fault because we are allowing them to do that," said Gheit. "Obviously these people are very strong, and the financial lobby is the strongest of any single lobby. I've been in this business 30 years, and I can tell you I think this is smoke and mirrors."
What's indisputable is that oil and gasoline are not in short supply, and that demand remains weak. That was crystal clear in the latest weekly energy market update by the U.S. Energy Information Administration _ published last week for the week ending Feb. 10.
"Total products supplied over the last four-week period have averaged 18.3 million barrels per day, down by 4.6 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged nearly 8.1 million barrels per day, down by 6.4 percent from the same period last year," said the EIA, the statistical arm of the Energy Department.
Inventories of stored oil are also unusually high, the EIA said.
"At 339.1 million barrels, U.S. crude oil inventories are in the upper limit of the average range for this time of year," the agency said. "Total motor gasoline inventories increased by 0.4 million barrels last week and are in the upper limit of the average range."
Hence, no shortage to explain soaring prices.
In fact, U.S. demand and consumption patterns are so abnormal compared to recent decades that oil and gasoline are both now being exported to Europe, Asia and Latin America.
Exports of U.S. refined product averaged 2.928 million barrels per day over the four weeks ending on Feb. 10, compared to 2.190 million barrels per day for the four weeks ending Feb. 11, 2011, the EIA said. This category is primarily gasoline, but it includes unfinished oils, fuel additives, ethanol and other blending components.
Similarly, the United States did not export any oil in the four weeks ending Feb. 11, 2011, but in the four-week period ending this Feb. 10, the nation exported 37,000 barrels.
The export picture suggests that when domestic demand rises, American motorists might be competing with drivers elsewhere for U.S.-made gasoline, which fetches a higher price as an export.
"To the extent that there is this export market that wasn't there before, it is certainly ... keeping prices higher than they otherwise would be," said Kilduff. "Exports were not material. Now they are becoming material."
The White House sought to deflect criticism about rising oil and gasoline prices. Spokesman Jay Carney blamed the prices on "a variety of factors on the global price of oil. They include unrest in certain regions of the world, they include growth in areas like China and India."
Another popular explanation for rising oil prices Tuesday was trader relief that Greece received another bailout payment from Europe. That raised hopes of a boost in oil demand in Europe as its economy recovers, given that a crisis has been avoided for now.
That explanation doesn't add up.
Last year, when oil and gasoline prices rose and slowed the U.S. economy, the surging prices were explained away by traders who said that oil and other commodities moved inverse to slumping stock prices. Today, oil prices and stock prices seem to be moving in tandem _ upward _ contradicting last year's justification.
East Coast refiners have seen their profit margins squeezed because they import Brent crude oil from Europe, which has traded at least $10 above crude coming out of the U.S. Gulf region.
Consolidation in the refining sector is another new wrinkle weighing on the oil and gasoline markets. The EIA, in a separate publication called This Week in Petroleum, warned last week that refinery closures in the U.S. Northeast and in some Caribbean countries could crimp supplies along the U.S. East Coast. Refinery closures and strained distribution could drive up gasoline prices on the East Coast until industry players make necessary infrastructure adjustments.
"On paper, refining capacity in the more competitive Gulf Coast and Midwest hubs appears more than adequate to make up for lost East Coast refining capacity. But the Colonial pipeline, which connects Gulf Coast refineries to the Central Atlantic, is already running near capacity levels, so bringing incremental Gulf Coast product volumes to East Coast markets could be a challenge," the EIA said.
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