By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Retail gasoline prices in the U.S continue to move higher and climbing wholesale costs in most major metropolitan markets through mid-March show the trend will continue into April. Moreover, the swift increases in gasoline costs that are being passed through the supply chain suggest the U.S. average price for regular grade gasoline will reach $4 gallon in April.
We’re quickly closing in on that psychological pump price. The Energy Information Administration’s (EIA) U.S. average was $3.829 gallon on March 12, a 10-month high. Meanwhile, a number of major markets around the country, including Los Angeles, Chicago and New York City are already contending with $4 gallon or higher gasoline prices.
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The top reason for higher gasoline prices is concern over lost Iranian oil to the market amid sanctions by a number of Western nations. Sanctions against Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), have already cut Iranian oil exports, with the International Energy Agency saying exports from the Persian nation could be halved as they tighten.
Iranian oil exports have averaged 2.6 million barrels per day (bpd).
Mixed messages continue to emerge from Iran regarding its nuclear program, with Western nations believing the country is pursuing nuclear weapons. Tehran denies the charge. An attack by Israel or the U.S. on the country’s nuclear facilities would spike oil prices.
Gasoline prices are also supported at higher levels on a series of refinery closures along the East Coast. In July, Sunoco Inc. has said it would permanently close its 335,000 bpd Philadelphia refinery, which would bring the total decline in East Coast refining capacity to 50%. That doesn’t include the closure of the 350,000 bpd HOVENSA refinery in St. Croix, which shipped gasoline and diesel among other oil products to the East Coast.
On Monday (3/19), Valero Energy said it would shut its 235,000 bpd Aruba refinery because of mounting financial losses, which it had been operating at a 40% to 80% run rate since 2010. The company is planning to end crude processing at the facility, converting the refinery into an oil terminal. Valero said it has lost $500,000 per day in operating the facility since 2009.
Atlantic Basin based oil refineries have been at a major disadvantage in recent years in an increasingly global market. Those refineries are paying for higher priced crude oil due to their design and the lack of pipeline capacity to bring cheaper Midwest and Canadian crudes to the East Coast. The East Coast also receives large amounts of imports, with more sophisticated refineries in Asia especially leaving East Coast refiners vulnerable. For instance, the EIA says India now exports about 40,000 bpd of gasoline to the New York Harbor.
In the short run, these refinery closures will support higher gasoline prices. In the next year to two, the industry will make adjustments to the supply chain to account for these refinery closures, alleviating the expected supply tightness for this summer.
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 16 years as an analyst, journalist and editor. He can be reached at [email protected].