Inventory Data Moves Oil Prices Lower

In the “simultaneity of the determination of crude oil prices and retail information” department, expectations of increased summer gas inventories in the US has reduced crude oil prices. Note that this price change comes on the expectation of information on inventories that will be released next week.

This reminds me of one of my favorite movies, Trading Places (which was on TV last weekend), where information about crop predictions moved prices for frozen orange juice in commodity markets.

This seasonal pattern happens every year, and has been exacerbated over the past decade because of the seasonal and market balkanization effects of the federal fuel oxygenate requirement arising from the Clean Air Act Amendments of 1990.


9 thoughts on “Inventory Data Moves Oil Prices Lower

  1. Even balkanized markets work, regardless of persistent government efforts to keep them from doing so. Hope springs eternal.

  2. Balkanized markets means more market power for those firms in those markets. More market power means higher prices. So yes, they work, but that wasn’t Lynne’s point.

  3. Balkanization of the market is the result of government requirements, not refiner actions, as Lynne stated.

    Balkanization leads to shorter refinery runs, greater down time for changeovers, infrastructure investment in process equipment required only seasonally and dependence on the availability of fuel ethanol. These factors lead to higher costs, which also lead to higher prices.

    Apparently the lure of the incremental “market power” margin which may be available to refiners in these balkanized markets has been inadequate to induce the construction of new US refinery capacity, or the modification or expansion of offshore refineries to permit refining and blending of the boutique gasolines which can command the higher prices you suggest result from the market power you perceive.

    I suspect that the gasoline market could be substantially de-balkanized without any significant adverse impact on air quality. However, there are a large number of legislative egos which would have to be salved in the process. Legislatures exert a type of “market power” which is beyond the capability of the markets to correct.

  4. Balkanization of the market is the result of government requirements, not refiner actions, as Lynne stated.

    Balkanization leads to shorter refinery runs, greater down time for changeovers, infrastructure investment in process equipment required only seasonally and dependence on the availability of fuel ethanol. These factors lead to higher costs, which also lead to higher prices.

    Apparently the lure of the incremental “market power” margin which may be available to refiners in these balkanized markets has been inadequate to induce the construction of new US refinery capacity, or the modification or expansion of offshore refineries to permit refining and blending of the boutique gasolines which can command the higher prices you suggest result from the market power you perceive.

    I suspect that the gasoline market could be substantially de-balkanized without any significant adverse impact on air quality. However, there are a large number of legislative egos which would have to be salved in the process. Legislatures exert a type of “market power” which is beyond the capability of the markets to correct.

  5. I am so glad someone else appreciates the economics and finance in “Trading Places”. There isn’t a whole lot of it, but students are fascinated when you tell them there’s something there they hadn’t thought about.

  6. How do balkanized markets affect project finance? Is this dynamic hampering the growth of the energy industry?

  7. How do balkanized markets affect project finance? Is this dynamic hampering the growth of the energy industry?

  8. JAG: I’m not sure they do. The political obstacles to building new refineries are largely unrelated to the “balkanized market” for fuels that Lynne attributes to the 1990 CAAA.

    A combination of genuine environmental concerns and reflexive NIMBYism makes the process of getting new refinery capacity approved prohibitively expensive and time-consuming. This is a question separate from how the fuel oxygenate requirement impacts markets.

  9. JAG: I believe Zathras is correct. If anything, it may be the balkanizers, not the balkanization itself, that have an impact on project financing, beyond the concerns Zathras raises above. Legislators and regulators can change the formulations required for boutique gasolines at the stroke of a pen, obsoleting some portion of the substantial investment in new, expanded or reconfigured refinery process equipment and/or requiring additional investment in new process equipment and plant reconfiguration.

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