Wednesday, July 3, 2013

Two contributors to crude oil spike

While nobody wanted to pay any attention to Egypt ten days ago (see post), all of a sudden the situation there is grabbing headlines. These protests were planned, June 30th was the starting date, and the military has been posturing for some time. And now that we've had the coup, the generals own Egypt's economic mess.

Crude oil popped above $101 in response to Egypt's unrest and its potential implications for the Middle East as a whole. The "Middle East premium" is back in play.

But another, more domestically based surprise driving WTI crude higher was an unexpected and quite sharp decline in US crude oil inventories.

Source: EIA

Some are attributing this decline in crude stocks to higher interest rates, which make storage of crude (cost of carry) more expensive. Perhaps. A better explanation however is the improved transport to the Gulf Coast refineries and a somewhat higher demand for refined products.

Source: EIA

This is not great news for the US consumer. The higher mortgage rates and the end to the mortgage refinancing spree were to some extent offset by a bit lower gasoline prices (although prices are still up on the year).


But given the spike in crude, that benefit of lower gas prices has ended for now. Consumers will pay more at the pump - and spend less elsewhere.
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