An expanding geopolitical risk premium in global oil prices combined with short-term forecasts that the world’s demand for oil and its byproducts will continue to grow in 2011 spurred by economic recovery have underpinned the staircase increase in retail gasoline prices.
Wholesale gasoline costs moved up sharply in front of the Presidents’ Day holiday, pulled higher by rallying New York Mercantile Exchange oil futures, with spot gasoline prices in the United States indexed to the Reformulated Blendstock for Oxygenate Blending futures contract, or RBOB. RBOB futures are advancing, reaching a 29-month spot high above $2.60 gallon, despite its seasonal tendency to decline into February on lower demand in January and February.
Implied gasoline demand, which is product supplied in the primary wholesale market, surged to a five-week high during the week-ended Feb. 11, according to the most recent data set from the Energy Information Administration. During the four weeks through Feb. 11 however, implied demand was flat with the comparable period in 2010.
“The snow and cold kept people at home this January, and many roads and highways were impassable for periods. That’s a big part of what you’re seeing in the demand numbers,” said American Petroleum Institute Chief Economist John Felmy, in commenting on monthly data released by the oil and gas trade association on Feb. 18.
The API shows gasoline deliveries in January averaging 0.9% higher than year prior at 8.602 million barrels per day.
Consumption growth for gasoline is seen limited by high retail gasoline prices, which the EIA shows averaged $3.14 gallon nationally for regular grade as of Feb. 14, and persistently high unemployment. Retail gasoline prices are expected to continue higher despite projections for only gradual growth in gasoline demand in 2011.
Another seasonal feature is for wholesale gasoline prices to increase from late winter, early spring into early summer. This is due for a couple of reasons, including the lead up to higher demand during the summer months.
Wholesale gasoline prices also increase as the industry transitions from lower costs in producing winter grade gasoline than summer grades, which have more stringent environmental regulations and can add 5 cents to 15 cents per gallon in production costs. We’re also in the seasonal refinery maintenance period in which refiners shut units for extended work outages commonly referred to as turnarounds. Indeed, the U.S. refinery run rate tumbled 3.5% during the week-ended Feb. 11 to 81.2%, according to the EIA.
Currently, climbing domestic gasoline prices are primarily being driven by worries of supply disruptions triggered by antigovernment protests in oil producing countries in North Africa and the Middle East. Ousted leaders in Tunisia and especially Egypt have sparked antigovernment activity in oil producing countries Libya, Algeria and Iran, and elsewhere in the region. And while no oil has been disrupted through these protests, there remains concern that this could still occur, inflating what is referred to as the global risk premium in oil prices.
This worry is being felt more acutely in Brent crude prices that are trading above $105 barrel, and are increasingly seen as a better barometer of the fair market value for global oil. West Texas Intermediate crude oil, the US benchmark, has been discounted sharply against the global oil market.
The underlying physical delivery location for the NYMEX crude futures contract is at Cushing, Oklahoma, which is landlocked. Moreover, recently completed pipeline extensions are bringing new Canadian supply to Cushing, bloating the inventory level there. This dynamic continues to limit NYMEX crude values against the global price, although the U.S. market is now linking higher finished products costs such as gasoline to the Brent counterpart.
This has proven a boon for Midwest refineries that have access to Cushing supply, and have demonstrated that benefit through high output levels, reaping lucrative margins while adding to already high levels of gasoline supply.
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 [email protected]