Diminished Upside Price Pressure for Gasoline Expected in 2014

By Brian L. Milne, Energy Editor, Schneider Electric

Reformulated Blendstock for Oxygenate Blending gasoline futures traded on the New York Mercantile Exchange fell to a one-month spot low Dec. 13 at $2.6152 gallon, pressured on building supply and weakening demand. NYMEX RBOB futures values are benchmarked against in the spot gasoline market and guides suppliers in setting wholesale rack postings.

View Schneider Electric’s Weekly and Historical Gasoline Price Index.

In contrast to softening values for the RBOB contract, the NYMEX WTI crude futures contract is trading in the upper $90s bbl, boosted, in part, by the end of refinery maintenance that has sparked increased demand for crude by refiners. The rotation out of seasonal maintenance also means more fuel manufacturing, with gasoline supply building sharply during the first half of December.

The transition, with refiners shutting for extended maintenance during fall and spring, creates this shift in strength and weakness within the oil futures complex, which is reflected in the crack spread. The crack spread refers to the return a refiner gets for processing a barrel of crude after subtracting crude and other costs. In looking at the financial crack spread, subtracting WTI crude from RBOB futures, the crack fell just below $14 bbl on Dec. 13, down from $21 bbl in late November, which was a four-month high.

In looking ahead to 2014, the Energy Information Administration (EIA) expects the national retail gasoline price to average less than this year or in 2012, with the declining average driven with lower crude costs. Crude values are expected to be pressured from growing supply next year, with global oil output forecast to outpace world consumption.

The expected rise in global oil supply is led by countries that are not part of the Organization of the Petroleum Exporting Countries, with the United States leading the drive higher in supply growth. Growing non-OPEC supply is expected to pressure production from OPEC in 2014, a time when the cartel also needs to bring Iraq back into the fold after years of war and the potential for an oil export ban against Iran to end.

Retail Price Drop
In its Short-term Energy Outlook released Dec. 10, the EIA projected the U.S. retail gasoline average for 2014 at $3.43 gallon, down from this year’s estimate at $3.50 gallon. For 2012, the average was $3.63 gallon.

In its 2014 Energy Outlook, the Bank of America Merrill Lynch expects gasoline in the Atlantic Basin to be under pressure from high supply due in large part to excess gasoline output from Europe. The bank also sees an oversupply of gasoline in Asia, with the region increasing refining capacity to address climbing regional supply and for export.

For the United States, the bank points to downside adjustments in targets under the Renewable Fuel Standard by the Environmental Protection Agency to ease costs for gasoline in 2014. In 2013, a climbing RFS, which requires refiners, blenders and importers referred to as obligated parties to offset a portion of their petroleum-based supply with a qualified renewable. The majority of the mandate is satisfied with corn-based ethanol.

The climbing compliance requirements collided with lower gasoline demand than projected in 2007 when the law, the Energy Independence and Security Act, was passed. Legislators missed forecast has created a scenario in which ethanol has reached a saturation level in the gasoline pool. Renewable Identification Numbers, the credits used by obligated parties to show compliance with the RFS and are tradable, spiked in 2013 to nearly $1.50 in July from less than a nickel in starting the year as a result. After the EPA adjustments, with EPA the administrator of the RFS, RIN values have tumbled to a 20 cents range.

“RINs are considered a cost on gasoline production, and tend to disincentive gasoline production and imports and support gasoline exports,” explained the Bank of America Merrill Lynch in their outlook. The bank said the EPA’s announcements easing compliance “relieved pressure on gasoline markets.”

About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.