Crude Math: What’s happening with oil prices?

Posted on: Tuesday, October 28th, 2014

3672116_sCrude Math: What’s happening with oil prices?

It is clear that the bottom has fallen out of gasoline prices since the summer – the average Canadian retail price is down over 11 cents per litre since the first week of September and nearly 20 cents per litre since their apex in June. This is not unusual for this time of year, as gasoline prices typically abate in the fall along with demand – effectively driving down refining margins and wholesale pricing along with it. Yet refining margins (despite a recent dip in mid-October) have remained virtually unchanged since April.  So what is happening here? The simple answer is crude.

Globally, crude prices have steadily fallen for the better part of four months.  WTI, a key North American benchmark price for light sweet crude, has dropped more than 20 percent since June, while its waterborne counterpart (Brent) has fallen nearly 25 percent over that same time. Western Canadian Select, an important heavy crude benchmark, is down 16 percent from its high in June.

This softening of prices is primarily the result of a confluence of strong production, and signals of weakening demand in key markets around the globe.  U.S. crude production continues to grow, reaching its highest level in 28 years, and is having a “sea change” type of impact on traditional supply relationships around the world. This growth has displaced upwards of 3.5 million barrels per day of U.S. crude imports. The net effect has been that OPEC (specifically Saudi Arabia) has asserted itself as the principal global “flex-producer” – having moderated their crude production over the last three years in an attempt to balance global supply. More recently, Saudi Arabia has opposed further reductions to their crude output, and along with the restoration of Libyan production, has left the global crude market in a state of oversupply.

Meanwhile, reports out of China and other centers of global demand growth, have signaled weaker than anticipated demand for the second half of 2014.  The outcomes have been significant growth in global crude inventories, and considerable downward pressure on crude prices.

So what is the outlook for crude as we approach 2015?

All eyes appear to be on three key indicators: OPEC (Saudi) crude output targets, economic reporting out of China, and ultimately global crude inventory levels. The expectation is that OPEC will lower their production targets in order to relieve some of the downward pressure on crude prices. However, the timing and magnitude of the resulting price impacts are uncertain given the current state of global inventories.  Current market information seems to support the notion that low crude prices will linger – at least for the remainder of 2014.

By Jason Parent, Vice President Consulting, Kent Group Ltd.

For further information, contact Jason Parent at 519-672-7000 ext 112.

Kent Group Ltd. is a London-based consultancy specializing in the petroleum refining and marketing industry. Kent Group Ltd. publishes the Weekly Pump Price Survey, Canada’s authoritative source of petroleum prices (available at no cost on our web site www.kentgroupltd.com). Our clients span a wide range of government, NGO and industry organizations with an interest in downstream petroleum issues. A full description of our consulting services is available on our web site.