More Upside for Retail Gasoline as Costs Work through Supply Chain

By Brian L. Milne, Refined Fuels Editor, Telvent DTN

Wholesale gasoline costs in metropolitan markets across the U.S. were mixed for the week-ended Monday (1/24), although most city averages moved lower in concert with a decline by the benchmark futures contract traded on the New York Mercantile Exchange.

Still, higher pass through costs continue to work their way through the supply chain, likely pushing the U.S. retail gasoline average higher for an eighth consecutive week.

According to the Energy Information Administration (EIA), the U.S. retail average for regular grade gasoline surged to a $3.104 gallon 27-month high on Jan. 17. The average is up 24.8cts or 8.7 percent since Nov. 29, 2010 when the string of successive increases began. Higher gasoline prices have been driven primarily by increasing crude costs, which are now trading below $90 barrel as worry over supply eases on climbing inventory levels in the US and comments from Saudi Arabia that the Organization of the Petroleum Exporting Countries (OPEC) might hike supply to meet rising demand.

View DTN’s Weekly and Historical Gasoline Price Index.

Saudi Arabian oil minister Ali al-Naimi said in a speech on Monday in the country’s capital of Riyadh that projections for increased demand for OPEC’s crude oil this year might prompt the oil producer’s group to increase its output. Al-Naimi said OPEC has an established policy of increasing supply to meet rising demand.

Saudi Arabia is the world’s largest oil producer and member of OPEC, which supplies roughly 40 percent of the global oil consumed. OPEC places quotas on its total production level in order to limit a supply buildup of oil that would depress prices.

Demand Increase
Earlier this month, the Energy Information Administration, the International Energy Agency (EIA) and OPEC all increased their expectations for global oil demand in 2011. The drivers were primarily expanding economies in Asia and the U.S., with growing economies using more energy.

Higher oil demand continues to come from countries like China, India and from nations in the Middle East. US oil demand also picked up in late 2010, although the growth pace slowed this month.

“People say demand is relatively weak in the U.S., but the U.S. is only one quarter of the market,” said John Felmy in a conference call with reporters on Jan. 21 regarding high gasoline prices. “China is growing at double-digit rates with India and the Middle East right behind them. It’s the world prices of oil that goes into the cost of manufacturing gasoline.”

Al-Naimi said even with an increase in OPEC’s crude output this year the group’s spare capacity would still have the ability to produce another six million bpd. The IEA, which is based in Paris, said it sees OPEC’s spare capacity slipping below five million bpd by year end.

Spare capacity offers a cushion in an event of a supply disruption or unexpected spike in global oil demand.

Another factor supporting high gasoline prices is expected seasonal maintenance at US oil refineries, which run through early spring. Called turnarounds, refinery operators will shut units for extended maintenance that can last for one to two months, depending on the amount of work. Refiners typically build up a reserve of supply ahead of this downtime to avoid supply disruptions with its customers.

A refiner can also buy in the open market to make up for its lost output due to maintenance. Still, historically refinery downtime has built a price floor for the market, limiting the price decline by gasoline.

Nonetheless, wholesale oil and gasoline prices look “heavy,” and due for a downside price correction that would pressure retail values. Longer-term, the trend remains pointed up, with the EIA estimating up to a 10 percent probability for the US gasoline average to top $4 gallon this August-September.

About the Author

Brian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 15 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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