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Crude Oil and Gasoline Prices Surge as does the Political Rhetoric

March 5th, 2012

OMAHA (Capstone Energy Services) – Over the last two weeks, crude oil and gasoline prices moved sharply higher, prompting strong rhetoric from all sides of the political spectrum. April NYMEX crude traded Thursday at nearly $109/bbl, up 10% in the last two weeks. April NYMEX RBOB Gasoline is at $3.35/gal up 10% since the beginning of February and up over 25% since the beginning of the year. As is usually the case when prices jump, a number of contributing factors exist:

Crude Oil: Several factors are simultaneously pushing crude oil prices higher, including anticipated demand increases, potential supply disruptions in the Middle East, weakness in the US Dollar, and an influx of non-commercial investments into commodities in general with a bias toward crude oil. The anticipated demand increases reflect an improving U.S. economy, continued strong growth in China and other emerging economies, and signs of an easing of the financial crisis in Europe. The expanding sanctions against Iran and threats of retaliation from Iran have created supply stability concerns as has the rumors and speculation about a potential Israeli attack on Iranian nuclear facilities. Should there be a disruption, Saudi Arabia will likely be able to pick up the shortfall, but risk that they might not is reflective in futures prices. Since January, the US Dollar has declined 4% in relation to other currencies. Since Crude oil is traded in US Dollars, the price of crude will move inversely with the value of the dollar. Finally, the shift in investment strategies by non-commercial investors has added to the already strengthening crude oil prices. There is a tremendous amount of investors and funds (Hedge funds, Pension Funds, Mutual Funds) looking to maximize returns. The recent influx of such investments added to the momentum of the already rising crude prices.

Gasoline: The situation with Gasoline is a bit more complex. Prices are rising even though demand has been falling. Obviously, the rising cost of crude oil is a major factor in these price increases. But the US delivery infrastructure for both crude oil and gasoline are also factors. The least expensive crude oil is in the interior US stored in Cushing OK and in the oil fields of North Dakota. There is not sufficient pipeline capacity to get the crude oil to the refineries in the Gulf Coast and elsewhere. As a result crude prices on the East Coast, Gulf Coast and West Coast all reflect European or Brent crude prices (now $126/bbl) rather than $107 NYMEX Crude. In addition, several major refineries in the northeast have been closed in the last two years amounting to 1 million Bbls per day of throughput. Some analysts suggest that refinery capacity this summer may be insufficient to meet the NE US gasoline needs, requiring imports of high prices refined gasoline. Without some pipeline and refining infrastructure improvements, gasoline prices in many parts of the country will continue to be pegged to the cost of European crude oil, subject to the volatility and geopolitical risk of the world crude oil markets.

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By Ed Freeman

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