Oil Traders Split on How Gasoline Demand Will Affect Oil Prices
As heating oil demand falls and gasoline demand rises, what will happen to the price of crude? (image: blog.nj.com and cnn.com)
As the heating season prepares to give way to the driving season, oil traders shift their focus from the market for distillates (including heating oil) to the market for gasoline. More people drive than heat their homes with oil, so crude oil futures tend to rally when gasoline demand picks up, as it usually does in the summer. According to The Globe and Mail of Toronto, traders are making big bets that gasoline prices are going to rise and rise soon. But according to the Wall Street Journal, gasoline inventories are near a 16-year high and refiners aren’t in a hurry to buy up crude before the summer—a sign that they are not worried about rising prices.
Big oil traders, such as the trading firms Vitol and Trafigura or investment banks like Morgan Stanley and J.P. Morgan, aren’t concerned about existing inventories, reports The Globe and Mail. As they see it, low refinery utilization will let increased demand quickly cut into gasoline inventories, shrinking supplies and raising prices.
While financial institutions see crude oil prices moving upward, the Wall Street Journal notes that refiners and fuel consumers haven’t taken steps to protect themselves from price increases. Perhaps Vitol and Morgan Stanley see this as further evidence supporting their case—refiners aren’t buying crude, therefore they won’t be producing much gasoline, reducing gasoline supplies and raising prices—but other traders disagree. Though rising gasoline prices higher profits for refiners, and they have an interest in making sure supply doesn’t overwhelm demand, rising crude oil prices increase the cost of business for refiners—if refiners thought gasoline prices would rise, they would have every incentive to buy crude oil now, before it becomes more expensive. Even if refiners have misjudged the direction of gasoline prices, the struggling sector may step up its activity if prices do begin to rise, profiting from price increases while simultaneously adding to supply and keeping prices from rising further.
Since the price of crude oil is the most important factor in determining the price of heating oil, heating oil consumers have a stake in whether or not gasoline demand drives up crude oil prices. For heating oil users who sign price-lock or pre-buy contracts, the price of crude oil in the summer months can be very important for the rest of the heating season. Heating oil users may even be affected by gasoline prices during this heating season; if gasoline prices start pushing up crude oil prices in March and April, even before many people in the US have started taking any summer road trips, that could affect the price of some consumers’ final heating oil delivery of the season.
