Diesel fuel prices increased for the first time in nearly two months this week, and while that uptick is small – less than a penny per gallon on a national basis – it’s a reflection of the recent spike in oil prices due mainly to concerns over shrinking inventories.
According to the Energy Information Administration (EIA), the statistical arm of the U.S. Dept. of Energy (DOE), the national average price for diesel fuel increased for the first time in eight weeks – though by rising less than a penny the cost of diesel remained essentially unchanged at $2.73/gal.
The EIA reported that the average price for diesel fuel is now 41 cents per gallon higher than this time last year. On the East Coast and Gulf Coast, the price increased a penny to $2.75 and $2.69, respectively. The price in the Midwest was a fraction of a cent lower, staying at $2.71. In the Rocky Mountains, the average dropped a penny to $2.73, while the average on the West Cost went up about two cents to $2.84, the EIA said. The agency also noted that the price of diesel in California rose a penny to reach $2.90.
The U.S. average price for regular gasoline increased at a slightly more rapid pace, climbing two cents to $2.61/gal., which is 99 cents higher than the price at the same time in 2008, EIA pointed out.
With the exception of the Rocky Mountains, prices rose in all regions of the country. The price on the East Coast inched up about a penny to $2.60/gal. The largest increase occurred in the Midwest, where the price rose more than three cents to $2.56. On the Gulf Coast, the average grew over two cents to $2.47. In the Rocky Mountains, the average price slipped less than a cent to remain at $2.50. On the West Coast, the average increased a penny to $2.86, with prices in California rising two cents to $2.93, the EIA said.
A spike in oil prices is behind the albeit small uptick in fuel prices; a spike expected to continue as U.S. oil inventories remain low in the face of colder-than-expected weather, which is driving up demand for home heating oil in the Northwest.
The price of light, sweet crude oil recently traded 67 cents, or 0.9%, higher at $79.54 a barrel on the New York Mercantile Exchange – a five-week high in pricing with Brent crude on the Intercontinental Exchange (ICE) trading 72 cents higher at $78.36 a barrel. Oil prices are now trading at roughly double the levels seen this time last year, when they dipped below $40 a barrel and to date this year, oil prices are up 76% percent, with some analysts predicting that it could reach $85 by year’s end, as concerns over supply start to mount.
The EIA reported that U.S. commercial crude oil inventories this week – excluding those held in the Strategic Petroleum Reserve (SPR) – decreased by 1.5 million barrels from the previous week, with total motor gasoline inventories decreasing by 300,000 barrels and distillate fuel inventories – from which diesel and home heating oil are produced – falling by 2 million barrels. Overall, total commercial petroleum inventories decreased by 8.1 million barrels last week, but are above the upper limit of the average range for this time of year, the EIA said.
Analysts believe cold weather in the Northeast is driving up demand for heating oil, while refiners are reducing oil imports to avoid end-of-year taxes on inventories. Yet refineries in the U.S. are still operating well below normal, raising utilization only by 0.2 percentage points last week to 80.3% of capacity. The question facing the market is whether inventories will continue to fall when the tax issue fades with the New Year and the worst of winter is over, analysts said.
“I believe that the next 100 days will see more [refinery] closures,” noted Tom Kloza, chief oil analyst for the Oil Price Information Service (OPIS) on his weekly blog. “U.S. refiners are processing less than 14-million barrels daily of crude [but] have a capacity to run almost 17.8-million barrels per day. One can make a reasonable case that refiners might need to run about 15-million barrels per day of crude for some peak weeks in 2010 if there is decent economic recovery, but that still leaves surplus capacity of 2.5-million barrels per day or more.”
Kloza thinks perhaps a half dozen U.S. refineries will close in 2010 – mostly in the first quarter – lopping off more than 500,000 barrels per day of capacity.
“I [also] think the [oil] market will gyrate wildly in the second year of the Obama Administration. It may not match the $33 to $82 per barrel range of the President’s first year … [but] my best guess is that crude oil will spend the early part of 2010 closer to $50 than $70 per barrel,” he explained. “Prices aren’t morbidly obese like they were in 2008, but they’re on the doughy side. Given the market’s tendency to exaggerate moves, I also believe that a $40-$100 per barrel low/high range for 2010 is not out of the question.”
The second half of the ongoing presidential term, however, will see much higher prices, said Kloza. “It’s tough not to make a case for strong crude oil prices, and strong gasoline and diesel prices in 2011 and 2012,” he said.
