There is no soft cushion for crude oil in Cushing

THE VAN DER VALK GAS PRICE ADVISORY FOR 2-13-09

This is a follow up to a question asked of me by Gary Richards, reporter with the San Jose Mercury News, about to details on how Wall Street has had a stranglehold on the crude oil trading market.

In the financial markets the relevance of continuing to use the West Texas Intermediate crude oil price for trades is just now coming into question. The posting relates to a storage tanks a at a terminal currently filled to the brim with the WTI crude oil in Cushing, OK. The position of the terminal is such that crude oil can be shipped by pipeline to various refineries in other parts of the country mainly the Gulf Coast of the U.S. Today’s decline in the March WTI crude oil price was achieved amid exceptionally brisk volume even though the contract is set to expire on February 20th.

The discount of West Texas Intermediate (WTI) crude oil, the grade traded at the New York Mercantile Exchange (Nymex), to London’s Brent crude oil posting widened to a record $10.67 a barrel today after supplies at Cushing, Oklahoma, rose once again.

The market is now already ignoring the March WTI price and concentrating on April. The March price is being squeezed by investors with positions and is being used to manipulate the price by the players in the game.

That has been happening every month in the past few months as the future prices are higher than the current month. Those with barrels in the current month are trying to trade them to forward months in order to find an advantage. The contract is nearing five-year lows of 32.20 dollars hit on December 18.

Refiners are at the same time buying crude oil at premium to the WTI crude oil price postings to allow feed stocks (wet barrels) to continue flowing into their facilities. That is opposite of the history where the wet barrels were usually being traded at a discount to the WTI posting.

The March WTI crude oil price, which settled below $40 a barrel in each of the last three sessions, traded down below $34 a barrel today. That is the lowest level seen in more than three weeks. This was based on builds of inventory reported on the weekly DOE stock statistics published yesterday.

The other posting widely used by financial circles is the Brent crude oil price, which is now about $11 higher than the WTI crude oil price. That means the WTI price disparity has grown larger with no real connection to what refiners are paying for their supply of feedstock. The Brent crude oil price is usually only about a few dollars higher.

The March Brent crude oil expires tonight and the question will be that if the WTI/Brent arb trade is lower than it did when it expired last month it will be a sign of further weakness in the landlocked WTI crude oil prices. It is now possible that we will see crude oil dip down into the 20’s but with no appreciable affect on gasoline prices.

The results of what has been happening on the Nymex in the last few years, with crude oil and gasoline prices, is all the proof one needs to see that Wall Street was in charge of determining the price we paid for the energy to run our industry. The true cost for exploring and producing oil has to eventually relate to what it takes to find it and bring it to the market.

The Oil & Gas UK organization, representing most of the major and independent oil producers in that country, came out with a report yesterday that said: "The cost of developing and producing oil and natural gas in 2008 rose by 12% compared with 2007. The break even oil price for new field investment is now over $40. Brent crude oil was posted at around $45 yesterday. Only a third of new developments now under consideration break even at current costs."

There is a disconnect between the price of gasoline in the U.S. especially on the West Coast with the price of crude oil price The price of gas has been increasing pennies a gallon almost every day and is now hitting the $2 per gallon mark in the U.S.

In California that price is already at $2.25 per gallon with the Greater Seattle area hitting $2.19 per the AAA fuelgauge reports. Meanwhile crude oil went down to $35 a barrel on the Nymex today from being at $40 on Monday. In the last few years gas prices would have followed in lockstep with crude oil prices.

A $5 a barrel drop in the price for crude oil would have typically meant an at least 10 cents per gallon drop in the price of gas. Instead the price in Washington State will be heading up some more and go over $2.20 per gallon as soon as tomorrow.

On the West Coast the gasoline and diesel spot market prices were basically flat today. The wholesale gasoline pipeline price did jump up another 6 cents per gallon yesterday. That makes the increase a total 17 cents per gallon for gasoline since Monday with the total affect not yet having been passed along to the pump price.

Meanwhile Billings, Montana has seen the biggest price spike for gasoline in the country. Their pump prices went all the way from $1.34 to $1.74 per gallon in less than three weeks.

In Phoenix the inversion between unbranded and branded rack gasoline is still an amazing 50 cents per gallon. In other words the independent unbranded gas stations have to buy their gasoline at a higher price than their branded major oil company neighbors.

Shippers have been hesitant to nominate tenders being shipped from El Paso to Tucson and in turn to Phoenix through the Longhorn pipeline. With questions about ownership of the product w being trans-shipped in the Longhorn pipeline. Without the Longhorn Pipeline volumes to the Phoenix market will be squeezed. In such an environment the independent refiners, like Western have also been hurting and are trying to keep their gasoline prices up.