EIA sees One-in-Four Chance for $4 Gallon U.S. Average in June

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

In its most recent Short-term Energy Outlook, the Energy Information Administration (EIA) pointed to a 25% probability based on activity in the financially traded gasoline market that its U.S. average price for regular grade gasoline would top $4 gallon in June.

“Recent options and futures price data imply that the market believes that there is about a one-in-four chance that the U.S. average pump price of regular gasoline could exceed $4 in June of this year,” said EIA.

Look for those odds to increase as the flow of gasoline and diesel into the New York Harbor market adjust to the shutdown of regional refineries there while bombast by Iran’s leaders could devolve into open hostilities.

The EIA projects a $3.55 gallon U.S. regular grade gasoline average this year, up 2cts from 2011’s average, on higher crude acquisition costs. During the peak driving season from April through September, EIA estimates prices averaging roughly 7 cents per gallon higher than the annual average.

View Telvent DTN’s Weekly and Historical Gasoline Price Index.

For perspective, the EIA last reported for the week-ended Feb. 6 the U.S. average at $3.482 gallon, which was a 4-1/2 month high. Since that update and the EIA’s short-term outlook, New York Mercantile Exchange RBOB futures (Reformulated Blendstock for Oxygenate Blending)–the gasoline contract, has traded at a 5-1/2 month high. The gain in futures pushed gasoline wholesale costs up, and that should be enough to bump EIA’s retail average even higher. In other words, we are quickly nearing the forecasted $3.55 gallon average for 2012 well in advance of heavier demand later this year.

Market Forces
There are a number of caveats that could slow or reverse the upside price trajectory. Firstly, the regional Chicago market is awash in gasoline supply, prompting suppliers to sharply cut their asking price. Meanwhile, preliminary data from the EIA shows gasoline demand remains weak, hovering near 10-year lows while down 6.9% this year through Feb. 3 compared with the same period in 2011.

The fresh highs in futures are also coming on increasing speculative positions. The most recent data from the Commodity Futures Trading Commission indicates that noncommercial market participants, which are those that do not have an underlying physical position to hedge so are considered speculators, moved to a fresh record net-long position as of Feb. 7. A long position is one in which the holder anticipates prices to increase over time.

This group of traders is carefully watched for directional change in the markets since noncommercial traders have greater flexibility in moving in-and-out of positions because they are not hedging against the physical market. Sudden selling by this group in what is known as long liquidation could send the RBOB futures contract and, along with it wholesale gasoline prices tumbling.

Higher gasoline prices are currently supported by the planned closures of refineries in and near Philadelphia, Pa., St. Croix, and in Europe. This lost processing capacity is seen tightening the supply-demand balance in the key New York Harbor market.

Additionally, the uncertainty surrounding Iran, the second largest oil producer with the Organization of the Petroleum Exporting Countries (OPEC), continues to add a geopolitical risk premium to oil prices. European Union leaders agreed to an Iranian oil embargo starting July 1 over Iran’s nuclear ambitions, which could prompt a response by Tehran, such as closing a key oil shipping lane in the Middle East. There’s also increased discussion that a military option to stop or stall Iran’s nuclear progress might be chosen by Israel, which would certainly spike oil prices.

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 16 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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