It's "déjà vu all over again" for gasoline markets in the US, as the patterns established during last year's driving season are manifesting themselves again.
And that means an unpleasant summer "rerun" for motorists albeit strong margins for refiners. A look at New York Mercantile Exchange futures prices for wholesale gasoline have topped $1/gal for the first time this year and have settled at their highest level since last June.
Much of this gain can be attributed to the rebound in crude oil prices. After falling or remaining relatively flat since mid-February, gasoline futures prices have risen 3 weeks in a row.
According to US Energy Information Administration data, regular self-serve gasoline at the pump, including taxes, averaged $1.50/gal across the US for the week ended Apr. 6. That tracks, to some extent, the recent rise in crude oil prices stemming from two agreements by the Organization of Petroleum Exporting Countries to cut oil production b a combined 2.5 million b/d in anticipation of the seasonally slack second quarter's demand decline. The first of those cuts was to kick in as of Feb. 1, the second as of Apr. 1. While there remain questions about how faithfully OPEC is adhering to the cuts, the perception that more crude is coming off the market at a time when crude and gasoline inventories are still very low has helped bolster oil prices. Since the year-to-date low of $25.96/bbl on Mar. 20, notes the American Petroleum Institute, crude oil prices have jumped to more than $28/bbl this week.
US gasoline supply woes
Let's not blame (or credit, depending upon your point of view) OPEC alone for the rise in gasoline prices.
On a per-gallon basis, the recent rise in gasoline prices has actually outpace that of crude oil. And the big spike in average gasoline prices last summer did not follow a comparable rise in crude oil prices.
Last summer's huge jump in gasoline prices owed more to the infrastructure and regulatory problems affecting the US gasoline supply system. New rules governing the specifications for fuels have spawned a "balkanization" of the US gasoline markets, reducing the system's flexibility to handle the transition to new fuels. So when a supply outage occurs-as was the case in the US Midwest last summer, with refinery and pipeline outages in the market most vulnerable because of its "boutique nature-the price effects are amplified.
Signs of an undersupplied US gasoline market already began to show up early this year. The International Energy Agency, in its Apr. 12 monthly market report, noted that the New York Harbor gasoline-to-crude oil prices spread more than doubled in January, pulling 70% more finished gasoline imports from Europe and the former Soviet Union to North America than in December. It says something about the state of the US gasoline when this sort of anomaly can occur in the dead of winter.
Summer gasoline problems
It's a safe bet that US gasoline markets will be tight again this summer, notes IEA: "Low stocks are contributing to a 'crisis' situation, first in gas oil and then in gasoline, as refiners attempt to balance their operations to meet peak seasonal product demand.
"Refiners on both sides of the Atlantic have had to adapt to the new market realities. They have shown remarkable flexibility and resilience. Nevertheless, tight crude and product stocks have contributed to significant uncertainty and end-user price volatility."
And refiners are seeing their flexibility and resilience tested to the limit, as a host of seasonal maintenance turnarounds are taking longer than expected to complete this season, which suggests that the amount of repair work needed after the end of the heating oil season has proven to be much greater than previously believed. Evidence of that is the recent dip in refinery utilization rates, last week falling below 90% for the first time in months.
An omen of this summer's likely price spikes was the jump in gasoline futures prices this week-up a whopping 25¢/gal since the beginning of March and more than a nickel just since the start of the week-that resulted from the explosion and fire at the former Coastal Corp. refinery on Aruba now operated by El Paso Corp. While the Aruba plant produces no finished gasoline, it does produce a lot of the feedstocks for blending gasoline at other refineries. That merely exacerbated a trend of upward price pressure emanating from 6 consecutive weeks of gasoline inventory declines. Even the small (315,000 bbl) increase in gasoline stocks for the week ended Apr. 6 brought US gasoline stocks to a level that was still almost 18% below the comparable year-ago level.
Even with gasoline stocks so low, prices high, and the economy slowing, is there much prospect of relief with reduced demand? So far that hasn't been the case, as the consensus is for an increase in gasoline demand this year of as much as 9%. While a slowing economy typically squeezes overall gasoline consumption, high oil prices also tend to boost air and sea travel costs as well. So while some motorists are curbing their "nonessential" driving, others are opting for travel by auto this year because those squashed stock portfolios and layoffs are ruling out that $5,000 Caribbean cruise or those $4,000 airline tickets to China. So the net result might be an offsetting balance.
So what does all this mean for refiners? An indicator of an answer to that question is in the observation by IEA that, during the second half of March, Atlantic Basin gasoline emerged as a key source of support for crude prices, instead of the other way around.
March refined product prices declined a bit, but less so than did crude prices. And, correspondingly, product stocks fell more steeply than crude stocks increased. As a result, refining margins benefited.
Merrill Lynch notes that average first quarter refining margins for all of the major North American and European refining centers have topped those for first quarter 2000.
Whether those higher margins persist, suggesting a fundamental secular improvement in the refining business today is, indeed, under way, or whether the economic slowdown derails the sector's recovery, is the subject of next week's column.
OGJ Hotline Market Pulse
Latest Prices as of April 13, 2001
Nymex heating oil
IPE Gas oil
Nymex natural gas