Could Fuel Prices Rise Farther? Watch Supply, Weather

Oil prices are at their highest level since July thanks to supportive inventory data this week. The Federal Reserve announced plans to slowly taper their bond-buying stimulus over the next year, which normally would cause prices to drop. However, given months of forewarning and planning, markets are taking the announcement in stride, even lifting oil prices a bit given added confidence. The Fed’s decision to wind down its stimulus program is a sign that they are confident the economy can handle it; that support is, in turn, giving traders optimism for the future.

Supply continues to be an important topic among oil headlines – with Gulf production stumbling and OPEC producers struggling to raise output as much as they want, markets are tight. Earlier this week, the EIA reported a 3.5 million barrel draw from crude inventories, continuing steady downward movements. Although oil prices are expected to drop a bit over the long-term, the short-term outlook is certainly for fuel costs to remain high, even rising a bit. US refineries, accustomed to offshore oil, have had to seek oil from other locations, including Canada, Iraq, and the Strategic Petroleum Reserve, to maintain output rates.

Weather will be another important factor. As we reported earlier this week, Goldman Sachs has warned that cold weather could boost oil demand and cause prices to move even higher. They’ve now set a price target of $90/bbl if this winter is as cold as expected – equal to a 40-50 cent fuel price increase. Cold weather would be an especially big strain for diesel, which is used to heat homes in the north. Diesel inventories are already low compared to seasonal averages, so strong heating demand mixed with low supplies could cause a big “pop” in prices this summer.