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

Oil markets are in a state of flux; caught between signs that historically high retail fuel prices are negatively impacting demand for gasoline while global spare oil capacity has narrowed substantially since the start of the year, highlighted by the civil war in Libya, a member of the Organization of the Petroleum Exporting Countries (OPEC).

The surge in oil and gasoline prices due in part to the latter created an overheated market that triggered sharp selling in early May, but wholesale prices remain high and there are mixed signs on the pace of economic growth in the U.S., which has been downgraded from a projected 2.9% expansion this year to 2.7%.

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

These factors are a few of the catalysts that have triggered enormous volatility in oil and gasoline prices in May, with the extreme price swings seen so far this month emblematic of a market torn between competing views.

Wholesale gasoline prices had surged into May on low U.S. gasoline supplies, with domestic inventory levels slumping to a 2-1/2 year low. The lower than usual supply level, 2.4% less than the five-year average during the final week of April, was due in part to refinery management more so than roaring demand. In fact, preliminary data from the Energy Information Administration (EIA) shows implied demand 0.4% lower this year through May 6 than during the same period in 2010.

“The failure of US motor gasoline demand to rise seasonally has been primarily driven by higher prices,” said Goldman Sachs in a research note issued on May 13. “However, it is important to note that we are not seeing signs of a collapse in demand, like we witnessed in 2008. What we are witnessing is demand restraint, not demand destruction.”

As of May 9, the EIA said the U.S. average for retail gasoline prices had inched up to $3.965 gallon, a 32-month high.

Wholesale Drop
Wholesale gasoline costs moved sharply lower in several markets during the week ended May 16, with gasoline prices slumping along the West Coast. Supply tightness has eased somewhat in the New York market, where wholesale costs were also under pressure, moving sharply lower from week prior. In the Midwest, prices also dove, although flooding from rising waters on the Mississippi River threatens to disrupt fuel supply patterns and again stoke wholesale costs higher.

Additionally, the wholesale market is tight lower RVP (Reid Vapor Pressure) gasoline used in the southern U.S. and regions of the country where there are efforts to cut pollution levels. In fact, Pennsylvania’s governor, Tom Corbett, recently sent a letter to the Environmental Protection Agency seeking a temporary waiver of lower RVP summer-grade gasoline in the Pittsburgh-Beaver Valley area until May 31 due to supply shortages.

Regional supply disruptions are filtered into the New York Mercantile Exchange RBOB (Reformulated Blendstock for Oxygenate Blending) futures contract, which serves as the price proxy in setting physical gasoline prices. So, potential supply problems caused by the Mississippi River would resonate across the nation. This is especially true since southern Louisiana hosts about 13% of the nation’s refining capacity, with supply then distributed to markets in the Midwest and Northeast along with the South. However, regional supply issues would have a more dramatic impact on those regions.

Rising waters on the Old Muddy have been carefully monitored, and suppliers have been busily shoring up supply in advance of the flooding, as in the case of Tennessee, where the river crested at a near record high on May 10. The big threat remains however, on the impact to supply distribution channels as flooding reaches Louisiana, with the river seen cresting in New Orleans near May 22. These events could spur higher gasoline prices in the near-term, with the U.S. gasoline average potentially challenging $4 gallon before backing off that psychological price point.

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].