Wholesale gasoline costs were mixed through the week-ending Monday (3/14), with prices in the West Coast bucking lower markets in most parts of the U.S. as California transitions to summer grade gasoline with a lower Reid Vapor Pressure reading. Retail prices will continue to advance on the updraft from previous spiking wholesale values triggered by unrest in the oil producing region in North Africa and the Middle East, with the New York Mercantile Exchange oil futures market likely putting in a short-term high on March 7.

There was an uneasy calm developing in the broader NYMEX oil futures market through March 10, which was overbought as market players aggressively added to long positions—buying a futures contract with the idea prices would continue to climb, as the geopolitical risk in oil prices were downgraded. The market was primed to sell off some of that length, with a growing consensus that increased production in oil heavyweight Saudi Arabia would satisfy lost supply from Libya amid civil war in the North African nation. That sentiment was fortified by climbing crude inventory levels in the U.S., which continues to see a higher flow of supply from Canada.

The oil market is reacting cautiously to the devastation caused in Japan by a massive earthquake and resulting tsunami. Five oil refineries in Japan, the world’s third largest importer of oil, are shut, which account for roughly 1.3 million barrels per day of crude processing capacity.

NYMEX crude oil futures fell below $100 barrel as news of the earthquake spread through markets, but has since traded on either side of the century mark. The contract reached a 2-1/2 year high of $106.95 barrels on March 7.
View DTN’s Weekly and Historical Gasoline Price Index.

Global Worries
In addition to the lost oil processing capacity, the market is also gauging the broader impact to the global economy as a result of the devastation in Japan, which is the world’s third largest economy. A slowdown in Japan’s economy would ripple around the world, implying less energy demand. However, as Japan rebuilds their country, they will need to increase energy imports.

Early Monday (3/14), the markets were reacting to this expectation, with diesel finding support on a projection of increased imports to Japan while gasoline was slumping on anticipation of the impact to US consumption. Diesel is not only seen needed to fuel heavy construction equipment, but also for electric power generation, which has been devastated through lost nuclear power plants.

Gasoline prices along with demand typically increase this time of year as we head into spring. Prices also climb as the country transitions to the more costly to produce summer-grade gasoline. These two factors will limit the current downside in gasoline prices.

Data from the Energy Information Administration shows that gasoline supplied to the primary market, referred to as implied demand, increased for five consecutive weeks through March 4, and has been above the five-year average for the last three of those weeks. The stronger consumption pattern despite high prices does suggest an American consumer aware of events in North Africa and Middle East topping off tanks ahead of a further increase in prices. However, prices are still expected to climb.

EIA on March 8 revised its outlook for the US retail gasoline price average for regular grade in 2011 up 41 cents from the previous month to $3.56 gallon, linking the adjustment to lost Libyan oil. They forecast a $3.70 gallon average for the April through September peak driving season, while giving a 25%t probability for the average to reach $4 gallon this summer.

For perspective, the US retail average was $3.52 gallon on March 7.

Although this forecast was offered before the horrific natural disaster in Japan, it does indicate the increasing expectation that gasoline prices will continue their ascent this year.

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].