‘Very expensive summer’ ahead, as gas prices could hit $2 a litre: Petroleum analyst

Gas prices in several Saskatchewan cities jumped $0.20 to $1.89 per litre this week, leaving many drivers feeling frustrated and outraged.

Roger McKnight, chief petroleum analyst at EN-PRO, joined The Evan Bray Show on Friday to explain the factors behind the recent jump in oil prices, and why drivers should expect to see prices at the pumps continue to rise.

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Listen to the full interview with McKnight, or read the transcript below:

The following transcript has been edited for length and clarity.

EVAN BRAY: This 20-cent-a-litre spike in gas prices seems too aggressive. Is it tied to the United Arab Emirates leaving OPEC?

ROGER MCKNIGHT: That’s got nothing to do with it. It’s got more to do with the constipation in the Strait of Hormuz. Product just isn’t moving out of that area of the world, and it’s causing all sorts of supply problems and driving up the price.

Some good news for drivers tomorrow. Your price is dropping by about five cents if all the rules are being played. That’s what should happen, anyway.

Getting back to your initial question, the problem is the Strait of Hormuz. It controls 20 per cent of the world’s supply of crude, and then you roll in all the gasoline, diesel and jet fuel that’s stuck in that waterway, then prices pretty well have to go up.

And until such time as President Trump shakes his head and comes to his senses and the Iranians do the same, then we’re in for a very, very rough ride for the next couple of months, or until that strait is open. And I can’t see that happening in the very near future at all.

You just said prices could come down tomorrow or this weekend. What is helping you predict or follow the up and down that these prices are taking?

MCKNIGHT: I really look at what’s called the futures market, which closes at four o’clock Eastern Time every day, and the traders on Wall Street say, ‘Boy, I think we should drop the prices down,’ so the prices go down on day one. That hits the wholesale price on day two, and on day three it eventually hits the pump price. So there’s always a delay, but the key to it right now is the futures market, as we see on Wall Street.

As a matter of fact, I’m going to really spoil your day. I think the prices of crude West Texas Intermediate, which is the one that drives prices in North America, are way too low versus the versus the Brent price. So that has to close, and that has to narrow. When that narrows, the prices are going to go up even higher.

What is a fair price right now? We search for the good deal, but is there a line in the sand that says “This is actually what would be a fair price right now for gas”?

MCKNIGHT: No, that’s a shot in the dark. It’s a dartboard. You’re spinning the dartboard and trying to hit a number. It drives everybody in this business crazy, because we’re trying to figure out President Trump. I didn’t do very well in mind reading, and I certainly can’t read his mind, and neither can the financial people or the traders. It’s just crazy.

I bring in different people from the oil and energy sector, and we talk a little bit about oil prices, and inevitably we get questions from listeners wanting to know: how are oil prices tied to gas prices? What is the connection? Because they don’t always seem to move in lockstep.

MCKNIGHT: It depends what part of the country you’re in. Prices west of Thunder Bay tend to follow the prices in western Canada. East of Thunder Bay, they follow what we call New York Harbor futures prices, so they’re completely different animals.

How is it tied to crude prices? Well, the price the pump in Canada is not made in Canada. It follows what happens in the United States, and that follows the wholesale price changes daily.

I’ll walk you across the country. The prices in the Maritimes follow, really, what happens at New York Harbor. Montreal follows Albany, New York. Toronto follows Rochester, New York. Northern Ontario follows Detroit. The prairies, including Northern B.C., follow Minneapolis. And lower mainland B.C. and Vancouver follow Seattle. So whatever happens in the United States eventually happens here.

Yesterday, we saw Donald Trump approve this Canada-Wyoming oil pipeline. Do things like that ever play, in a positive way, into this discussion?

MCKNIGHT: I was sort of fascinated with that statement by President Trump, because wasn’t it about six or seven months ago he said “We got all oil we want. We don’t need Canadian oil. We don’t need Canadian steel”? And he changed his mind yesterday. I guess he does need Canadian oil, and he will probably need Canadian steel and a lot of Canadian things.

But, like I said before, it’s impossible to read this guy’s mind. I mean, is this another Keystone? Is this the son of Keystone that he’s coming up with? Because it sure sounds like it.

A lot of people are wondering what’s going to happen for the summer. Typically we do see gas go up in the summertime. We can be as high as about a $1.90 a litre right now. Where do you think it’s going?

MCKNIGHT: I think $2 a litre is a great possibility, and probably a probability, because this situation in the Middle East is not going away. It’s not going away anytime soon. Even if the Strait of Hormuz was open today, you wouldn’t see any benefit for two months because it takes so long to clear that mess out of the strait. So this is going to be a very, very expensive summer. We have the driving season coming up. We’ve seen the U.S. inventories drop for crude, for gasoline – that’s a worldwide phenomenon.

As you know, the Brent crude is much higher than WTI, so it’s going to be a very, very expensive summer, I believe. Sorry, folks.

Saskatchewan prices are as high as $1.89 a litre right now. Do you have a sense how that compares to other places in Canada?

MCKNIGHT: That’s pretty much what we have in southern Ontario. I find the prairie provinces tend to match up with what’s happening in southern Ontario, but Vancouver really follows whatever happens in the Los Angeles market, and so that’s a magical mystery to me.

I think we’re all on about the same boat, but the taxes are all different right across the country.