An explosion and fire at a Texas refinery was largely responsible for driving the futures price on light, sweet crude oil to over $100 per barrel two consecutive days last week. The Big Springs refinery, 290 miles west of Dallas, has the capacity to process 70,000 barrels of crude oil per day, but was completely shut down. It is expected to resume partial operations within two months, but frankly, this is a very small refinery. This panic shows that oil traders react first and think second.
On Thursday, the Energy Department reported that U.S. crude inventories rose 4.2 million barrels in the week ended February 15, which outstripped the increase of 3.2 million barrel that analysts had anticipated. Gasoline demand averaged nine million barrels a day, which is only 0.5% higher than a year ago. Demand for distillate fuels (diesel, jet fuel, heating oil, etc.) averaged 4.3 million barrels per day over the last four weeks, down 1.9% over the same period last year. There is no doubt that high gasoline and diesel prices are already curtailing consumption in the U.S.
The next big test will be whether or not consumption will rise as the summer driving season approaches. In late March to early April, many refineries in the U.S. switch from oxygenated winter fuels to summer fuels, so the inventories of gasoline often tighten then. However, if the inventory of gasoline remains higher than normal due to moderating consumer demand, then the price of crude oil may decline. This is why many economists expect an oil price decline soon.
On Thursday, famous oil man T. Boone Pickens announced that he is short crude oil and natural gas and expects that prices will fall near-term. Speaking on CNBC, Pickens stated that he expects the price of oil to fall $10 to $15 a barrel in the second quarter. However, Pickens also said that he expects the price of oil to be back above $100 a barrel in the second half of the year. Pickens also mentioned that natural gas prices are unusually high and said he expects them to moderate.
In the interim, crude oil traders are obviously on pins and needles, poised to react to any bad news around the globe. Since the U.S. still consumes about 25% of crude oil worldwide, any slowdown in demand can reduce prices. However, since no one really seems to have a handle on what consumer demand will be like this summer, crude oil prices still remain stubbornly high.
