Will Crude Oil Prices Reach $80?
Published by the Energy Information Administration July 18, 2007
The price of crude oil has risen considerably since the beginning of the year, with the near-month futures price of light, sweet crude oil traded on the New York Mercantile Exchange (NYMEX) reaching $75 per barrel at one point during trading on Tuesday, July 17, which is only $2 per barrel less than the previous closing day record price of $77.03 per barrel set almost exactly a year ago (July 14, 2006). With the futures price increasing, some people are wondering if crude oil prices will reach $80 per barrel at some point this year.
The trick answer to this question, though, is that light, sweet crude oil prices have already reached $80 per barrel, just not for West Texas Intermediate (WTI), which is the light, sweet crude oil traded at the Cushing, OK delivery point for the NYMEX futures contract. Any premium on light, sweet crude oils has implications for retail prices for refined products, such as gasoline and distillate fuel.
As shown in the chart below, other light, sweet crude oils traded globally and domestically have already reached $80 per barrel or are quickly approaching that price level.
Nigerian Bonny Light (Bonny Lt) crude oil spot prices in Europe have been at or above $80 per barrel since July 9, while here in the United States, Louisiana Light Sweet (LLS) reached $80 per barrel late last week.
Another widely traded light, sweet crude oil, Brent, was recently trading above $78 per barrel in Europe. At the beginning of this year, Brent was trading at a discount to WTI, Bonny Light was at a very small premium, and LLS (over $2 per barrel) was at a considerable premium to WTI. But given the price of Brent, Bonny Light, and LLS, WTI would be expected to be very close to $80 per barrel, if not above, already. EIA has already discussed the reasons why WTI is now at a considerable discount to all three other crude oils. What has been overlooked among many analysts is how the price of crude oil has risen much more than maybe initially apparent, and what impact that has had on U.S. retail gasoline and diesel prices.
In analyzing the rise in retail gasoline and diesel prices this summer, much of the analysis has focused on refinery outages, both from maintenance and unplanned events. These refinery outages are a key factor in the rise in retail gasoline and diesel prices. But what has been overlooked by many is the impact high crude oil prices have had, as well.
With fuel specifications evolving towards cleaner and cleaner refined products, refiners are looking to purchase sweeter (low sulfur) crude oils, thus putting an increasing premium on these types of crude oils.
If not for the primary focus on WTI, this premium would be much more visible, but it exists nonetheless. As a result, a significant portion of the rise in retail gasoline and diesel prices is related to higher crude oil prices, particularly light, sweet crude oils. While the U.S. refining situation will continue to cause retail prices (especially gasoline) to fluctuate up and down, it is crude oil prices that will likely keep retail prices from falling dramatically over the next few weeks, and could lead to further retail price increases as summer progresses. A continued premium for light, sweet crude oil in the fall and upcoming winter, could put upward price pressure for heating oil.
Regardless of where crude oil prices head over the remainder of the year, $80 per barrel prices have already occurred, both overseas and domestically.