Posted in: Gas Prices,
by Patrick DeHaan on Jun 24, 2010 11:39 AM
With gasoline prices going back up, many have asked what's going on to cause prices to rise, so let's tackle that today. Let's first understand what caused prices to drop, so you understand that the drop only could last a certain amount of time.
Major reason #1 behind prices falling in May was debt concerns in Europe. Why does this impact gasoline prices here, you ask? Many reasons. First, it highlighted problems many countries may have in the future. Debt issues have the potential to slow not only European economies, but also the American economy, and those in Asia. The issue is that an unexpected major issue such as debt could have a huge negative impact on oil demand- thus the downfall.
Second, we saw few major refinery issues this spring. The only real issues occurred in the West, where prices were well out of proportion with the rest of the country. Relatively speaking, spring maintenance went well with few problems. This also puts downward pressure on oil and gasoline prices since refiners are able to refine and have plenty of spare capacity.
Now that we understand why prices fell, here's what is fueling prices higher again in the last couple weeks.
First, the perception on the market was that oil prices fell too quickly and out of proportion. That perception led investors to get back in the market. Second, investors had been ignoring signs of positive economic growth as of late. While the picture isn't necessarily rosy, demand has shown growth, and distillate demand has shown huge improvement over last year. We're also seeing some minor refinery issues now, which adds on to the sentiment of higher prices. July 4 is approaching, demand will likely rise compared to last year, adding to influence traders positions.
Let's not forget about hurricane season as well- in the past decade, the oil industry has seen billions of dollars in assets crumble as Katrina flattened and destroyed rigs, refineries, and power infrastructure. For this reason, traders are more nervous than ever about further storms in the Gulf. We're also seeing more news come out of the Middle East, and area that holds a significant chunk of the world's oil reserves. The louder the "chatter" gets, the more nervous investors get to buy at today's prices, pushing them up as more investors flock to oil.
More recently, we've also seen the dollar lose a bit of ground against the Euro. Since oil is denominated in U.S. dollars globally, any weakness in the dollar will boost oil prices.
There are some promising signs that the recent oil rally will calm down, but I'm also very cautious about hurricane season influencing prices higher.