For most consumers, the oil markets have the greatest impact at one proverbial place: the pump (at least as they perceive it). But rising prices and general volatility have far greater impacts that cascade across the supply chain, impacting transportation costs (and surcharges), plastics and chemicals, general energy cost and much more. Over on Spend Matters' sister site, MetalMiner, Stuart Burns recently took it upon himself to to examine what's on the oil horizon, starting with the fact that oil (at least oil as traded in Europe) is at a six month high (roughly $118 a barrel at the time he wrote the article). He suggests that, "the spot price has been rising on concerns over where the showdown with Iran is leading."
Moreover, the world appears to be attempting to play a demand manipulation game (in part to gain negotiation leverage) both with Iran and also economic rivals. For example, "the Chinese, usually buyers of some 20 percent of Iran's output (or about 550,000 barrels a day) are said to have cut back by 285,000 barrels in January and February, and are now extending this to March." This move has led at least some others to increase their purchases, including India, which is "Iran's second-largest customer at an average 341,000 barrels per day". But the threat of Iran and the gamesmanship of its customers only explains part of the overall volatility and upward pressure on the oil market (not to mention the rising spread between WTI and Brent crude oil).
As Stuart observes, "For a number of reasons, including outages at Midwest refineries causing a drop in demand, tight pipeline and storage capacity and a rise in supply (notably from the Canadian oil sands and from the Bakken shale oil region of North Dakota), the US is awash with oil, forcing not only WTI to trade at a widening discount to Brent, but Canadian synthetic crude to trade at a discount to WTI. From a discount of $31.25 per barrel a month ago, Western Canadian select heavy crude is at a $31.25-per-barrel discount to WTI this week, about 50 percent of the spot Brent price, according to the FT."
Where does this leave us as we race toward months when consumers typically feel the impact of high oil prices the most (summertime)? Stay tuned as we explore this topic in Part 2.