Recently, U.S. oil prices have been on a steady climb, raising fresh concerns about escalating inflation in the market.
While supply and demand dynamics play a role, are there other factors at play?
On Tuesday, September 19, sources cited by media outlets pointed to the trading arm of French oil giant Total, Atlantic Trading and Marketing, as a key player in driving up prices in the U.S. physical crude oil market.
West Texas Intermediate (WTI) crude oil prices, delivered in Cushing, Oklahoma, have jumped to their highest premium since last November. Meanwhile, futures prices have soared to over $90 a barrel. Overseas buyers are now having to pay an additional $1 to $2 per barrel to ship crude to the Gulf Coast for export, and Total is one of the companies willing to foot this bill.
Given the current price levels, U.S. crude is quickly becoming too expensive for buyers in other regions, who rely on U.S. oil as a last resort to fill the global oil shortage caused by OPEC+ production cuts. While this could mean more oil remains in the U.S., there are concerns that rising U.S. crude prices will inevitably lead to increased gasoline and fuel costs both domestically and abroad, potentially amplifying inflationary pressures.
Some analysts believe that Total's willingness to pay the extra cost reflects the intense competition for U.S. oil amid tight global crude supply. Even as refineries undergo seasonal maintenance, U.S. refining profits remain at a historic high of around $30 per barrel. Additionally, with Russian crude prices on the rise, the Asia-Pacific region is increasingly importing crude from the U.S.
However, light and heavy crude produced in the U.S. Gulf Coast isn't a direct substitute for the heavier crude produced by Saudi Arabia and Russia.
As demand for physical crude increases, futures prices are also skyrocketing, partly due to hedge funds flocking to crude futures as prices rise. On Tuesday, the nearest WTI contract traded at $1.33 higher than the following month's contract, with subsequent spreads reaching $1.71. These premiums, the largest in months, indicate a scarcity of supply at the futures delivery point in Cushing, Oklahoma.
Over the past three months, inventories in Cushing have been gradually declining, dropping to less than 25 million barrels, the lowest level since last December. Further depletion could threaten Cushing's operations - if stocks drop below 21 million barrels, tank pressures decrease, making oil extraction more challenging.
Some analysts believe that the dramatic fluctuations in oil prices present one of the biggest challenges for the Federal Reserve. While Fed policymakers focus on core inflation, which excludes volatile categories like food and energy, rising oil prices will push up the cost of durable goods, harm the economy, and make it challenging for the Fed to meet market expectations of three rate cuts next year.
