U.S. retail gasoline prices are moving higher, with the ascent in position to continue into March even though gasoline demand so far in 2014 trails the year-ago period by 144,000 bpd or 1.7% per federal government data, with driving snarled several times in the heavily populated Midwest and East Coast regions of the United States due to harsh winter weather.
The most recent summary from the Energy Information Administration on retail gasoline prices shows the national average for all formulations of regular grade surging 7.1cts to a $3.38 gallon 4-1/2 month high for the week-ended Feb. 17. Wholesale gasoline prices galloped higher in most major metropolitan markets since then, notably in the Upper Midwest and in California.
Higher wholesale gasoline costs are spurred by several seasonal features affecting the motor transportation fuel, including the transition to lower Reid vapor pressure ratings and maintenance at refineries. RVP ratings measure the emission release from gasoline which occurs at a greater pace when temperatures increase. As a result, environmental regulations require refineries to reduce RVP ratings from winter to summer, with lower RVP gasoline costing more to produce.
In spot trading, the bulk wholesale market for gasoline ahead of distribution terminals, the step down in RVP gasoline has already occurred in the Los Angeles Basin and will take place this week in San Francisco. In the Gulf Coast market, there’s been recent active trading for lower RVP gasoline conventional grades that will move to the full slate of gasoline for the producer market this week, too.
Higher gasoline prices also come with maintenance at U.S. refineries, with protracted work called turnarounds. The refinery season runs from January through May, peaking in March-April, with refineries in California typically the earliest to begin the turnaround season.
The most recent data from the EIA shows refinery utilization averaged 86.8% during the second week of February, well above the year-ago and the five-year average run rates of 82.9% and 82.0%, respectively. The run rate is expected to have declined since, reducing gasoline output.
The futures market portends higher retail gasoline prices amid these seasonal changes, with the March RBOB contract on the New York Mercantile Exchange rallying to a five-1/2 month high on the spot continuation chart at $2.8628 gallon Feb. 21, retracing the downtrend following higher summer demand in 2013. The March contract expires Friday (2/28), with April RBOB trading at a 16.0cts to 17.0cts premium to March and moving into seasonal backwardation.
Backwardation is a bullish market structure in which the nearest delivered contract trades a premium to deferred delivery despite carrying costs.
Although trending higher, ample domestic supply and flat to lower growth in gasoline demand should cap the upside in futures trading. The suggested price ceiling comes during a time of year when in past years the contract would explode higher in what’s called a preseason rally ahead of the summer when demand for gasoline is highest.
About the author
Brian L. Milne is the Energy Editor for Schneider Electric—a global specialist in energy management. Milne has been focused on the energy industry for 18 years as an analyst, journalist and editor. He can be reached at [email protected].