U.S. oil prices jumped above $106 a barrel Wednesday, their highest level in over a year, as stockpiles of crude dwindled and tensions in Egypt kept traders on edge. Gasoline prices in the United States also began to move higher.
Oil prices rose nearly $3 a barrel following a report from the American Petroleum Institute showing a 9 million barrel draw down in crude oil stored in tanks around the country. Another report from the U.S. Energy information Administration showed a similar draw.
The $3 rise comes on top of gains made over the last couple of weeks after widespread protests and a military takeover in Egypt. U.S. oil prices are up 10% since the end of June.
The rise in crude prices is beginning to make its way into the cost of gasoline. After falling for several weeks, average gas prices in the United States ticked up 2 cents a gallon overnight to $3.50.
"There are going to be a lot of unhappy people if gas prices continue to rise quickly in the coming days," Michael Green, a spokesman for AAA, said in a press release Wednesday. "This is among the busiest times of the year for driving and no one wants to pay more to fill up their gas tank."
Crude stockpiles: The draw down in crude oil supplies is partly the result of an upgrade to a giant BP(BP) refinery in Whiting, Indiana. That upgrade now allows the refinery to process 250,000 more barrels of oil per day -- oil that comes out of crude stockpiles.
But the larger picture is that the oil industry has gotten better at alleviating a glut of crude supplies, especially in the middle part of the country.
That glut was caused by the recent boom in U.S. oil production from places like North Dakota's Bakken Shale and Texas' Eagle Ford. The oil was being pumped, but the infrastructure to move it to market wasn't in place. That led oil to pile up in places like Cushing, Okla. -- home to the convergence of several pipeline, oil storage tanks, and the delivery point for the most widely cited U.S. oil contract -- West Texas Intermediate.
As a result, for the last couple of years WTI prices were some 20% below other oil contracts traded both in the United States and globally --such as the North Sea's Brent crude.
Over the last several months, new pipelines have opened and more oil is being moved by rail.
"It is clear that the various pipeline workarounds and rail shipments are having an effect," Mike Fitzpatrick, editor-in-chief of Kilduff Report's Energy Overview, wrote in a note Wednesday. "There is still plenty of oil in storage and being produced. But the facts on the ground in Cushing are changing."
WTI prices are now nearly even with Brent prices -- which is more the historical norm.
Egypt: The country itself doesn't produce much oil. But it sits astride the Suez Canal, through which some 4 million barrels of crude oil and other petroleum products pass each day. Traders fear the unrest may disrupt that flow.
There's also concern the events in Egypt -- a populous country that's considered a bellwether of Arab opinion -- could spark broader protests across the Middle East and North Africa. The region is home to about a third of the world's oil production.
Brent oil prices are up about 7% since the start of the violence.
The protests were sparked two weeks ago by millions of Egyptians unhappy with the increasingly authoritarian rule of the county's democratically elected, Islamist President Mohamed Morsy. The military ousted Morsy last week, and the country has since descended into chaos that's left scores dead.
Gasoline prices: Whilepump prices are on the upswing, they may not rise as far or as fast as oil prices, for several reasons.
First, the BP refinery, while taking oil off the market, will produce gasoline. That should add to national supply and help keep prices lower.
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Second, While WTI prices have risen 10%, U.S. gasoline has always been made with a blend of crudes, not just WTI. So the rise attributed to the easing of the bottleneck in Cushing and elsewhere in the middle part of the country shouldn't have too big an impact on gasoline prices, except perhaps in the Midwest.
Finally, while the unrest in Egypt may be propping up prices globally, there is little else in the way of solid economic news that would support oil prices at this level. Economic data out of China is looking particularly weak.
"With the move above $105, you may sell at will," Fitzpatrick wrote in his note, meant for oil traders. "The slowdown in China cannot be denied and the market will adjust to the emerging Cushing dynamic."