Tags: gasoline | prices | higher | crude

‘Perverted Logic’ May Drive Gas ‘Well Above’ $4, Energy Expert Schork Says

Wednesday, 15 Feb 2012 01:33 PM

Gasoline prices will soar "well above" $4 a gallon and possibly higher this summer due to "perverted logic" as rising crude prices force refiners to close their doors, further cutting supply and pushing prices higher, says commodities research analyst and trader Stephen Schork.

Gasoline prices are hovering around $3.50 a gallon, higher than they normally are this time of year, according to the AAA Fuel Gauge Report.

In 2008, when gasoline prices broke records, average prices didn't hit $3.50 a gallon until April 21, which is more than two months away, the Los Angeles Times reports, citing the AAA Fuel Gauge Report data.

Iranian threats to close down the Strait of Hormuz and crimp the world of crude supply is sending global oil prices climbing.
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As a result, pricier crude is forcing U.S. refiners to pass on costs to consumers, who balk when prices at the pump approach $3.50.

When consumers buy less, refiners close down due to lack of demand, although those closures erode even more supply from the market, thus sending gasoline prices back up again as part of a vicious cycle.

"You have this kind of perverted logic now," Schork told Moneynews in an exclusive interview. "The refiners cannot make money, because there is no demand for what they are making or the demand is very weak with high gasoline prices. So they are either limiting their capacity or they are shutting in their refineries altogether."

More than "300,000 barrels a day of gasoline production on the East Coast of the United States is currently shut in, it's closed," said Schork, editor of the energy newsletter The Schork Report.

"We are on this hamster wheel where high crude prices from geopolitical fears are driving refiners out of business. Refiners are out of business because demand for gasoline is weak and the fact that refiners are pulling back is driving gasoline prices even higher."

Furthermore, as the spring approaches, seasonal factors push up fuel prices, as more expensive inputs are used in refineries to produce warm-weather blends.

Increased driving in the U.S. also pumps up prices in the spring and summer.

"That prices are at all-time highs for this point of the season given where crude oil prices are trading right now, gasoline prices this summer on the East Coast are going to be well above $4 a gallon," Schork says.

In the Rocky Mountains and Great Plains states, ample oil supply is available to keep prices lower, although pipeline capacity is lacking to bring that supply to thirsty East Coast markets.

Operators along one pipeline, run by Canadian firm Enbridge, are working to reverse the flow of the line to carry more oil from the upper reaches of North America further south by June, which may provide some relief, Schork says.

"Now the situation is are we going to be paying records? It's kind of hard to say we're not going to be paying records at this point," Schork says.

Repeat performance

Still, however, the world has seen global oil supply shrink in the past.

Last year, the Arab Spring uprising spread to Libya, and supply fell sharply during the chaos.

And while Iran may beat its chest and threaten the world in the face of sanctions, in the end, the country has to sell its oil in order to keep petrodollars flowing into its economy.

Iran also cannot close the Strait as it has to import gasoline and other derivatives — while Iran is rich in crude, it refines very little.

Adding to that, Europe has said it will embargo Iranian oil and should others follow suit, the only buyers remaining would likely be China and India, which would enjoy the position to dictate prices to Tehran since nobody else would be buying.

Furthermore, any attempt to close the Strait of Hormuz would cut off the shipping lanes used by oil-rich Arab countries, which could launch military campaigns themselves should Iran make good on its threats.

Translation: Iran will back down.

"The likelihood that Iranian barrels go missing is limited," Schork says.

The access to Libyan oil returning to the market, possibly more Canadian oil flowing south and the likelihood that Iran will stand down offers some relief.

Yet consumers shouldn't breathe easy, as if and when Iran determines that isolation and economic disaster is not worth pursuing a nuclear bomb, geopolitical tensions have already pushed up oil enough.

"East Coast refiners are paying upwards of $120 a barrel to get oil into their refineries, and $120 a barrel in the East Coast translates well over $4 or $4.10 or $4.20 for a gallon of regular gasoline this summer," he told Moneynews. "Some market areas will be closer to $5 than $4."

Prices might not stay that high for long.

Last year, the Obama administration along with international energy agencies released 60 million barrels of oil into the market to alleviate prices, half of which came from U.S. stockpiles.

In an election year, don't be surprised to see a repeat performance.

"If we are paying more than $4, given that this is an election year, I could almost guarantee Obama is going to do it," Schork says.

Other experts agree market factors don't look good for those sensitive to pain at the pump.

"This definitely sets the stage, potentially, for much higher prices later this year," says Brian L. Milne, refined fuels editor for Telvent DTN, a commodity information services firm, the Los Angeles Times reports.

"There's a chance that the U.S. average tops $4 a gallon by June, with some parts of the country approaching $5 a gallon."

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