US summer gasoline prices could hit $4 despite large supply

11 January 2011 21:11  [Source: ICIS news]

HOUSTON (ICIS)--Industry analysts and executives have said retail US gasoline prices could reach $4/gal this summer as tight east coast supply takes a toll on other markets, according to a trader on Tuesday.

“I think $4/gal  is possible this summer, but demand would probably fall once we hit that marking, making $5/gal a difficult number to reach,” the trader said referring to retail gasoline.

In late December, the energy industry buzzed when former Shell president John Hofmeister said gasoline could reach $5/gal by the summer of 2012. Now chief executive of the non-profit Citizens for Affordable Energy, Hofmeister said this level could be reached without the possible gas tax hike.

Analysts have predicted that if retail gasoline continues to rise at a pace of 1-3% weekly from its current average of $3.09/gal, it could top $4/gal in the summer.

A market trader said that $4.50/gal on the east and west coasts is a possibility.

Prices of oil and gasoline dropped sharply in 2008 as demand fell when retail prices exceeded $4/gal. This prompted consumers to conserve fuel, leading to a plummet in demand.

Oil reached $145.26/bbl in July 2008 then fell 73.5% to $38.53/bbl by January 2009.

The current amount of gasoline available worldwide shows that supply has outpaced demand, which typically leads to a drop in prices. Gasoline and distillate inventory remain above the five-year average, with demand suffering and refinery runs near 90%, according to the US Energy Information Administration (EIA).

For this reason, many traders, producers and consumers remain unsure why refinery profit margins for gasoline remain so high.

Margins have lingered between $13-14/bbl for the past week, the highest level since mid May. Margins, referred to as crack spreads, are based on prices for gasoline on a per-barrel basis compared with crude oil.

“Refining margins have really took off the last couple of months. We are seeing unheard of gasoline and distillate cracks in January,” the trader said.

This has led refiners to produce even higher yields of gasoline, adding to the current surplus.

A possible reason for higher gasoline prices is that, despite the overall surplus, supply has been tight on the US east coast, affecting New York Harbor margins and trickling down to boost US Gulf (USG) coast margins.

Limited supply on the east coast has been caused by allocation, or delayed delivery, on the Colonial Pipeline and refinery outages.

The jump in USG refinery cracks could have been a reaction to the rise in east coast refinery margins as a result of tight supply.

Read Paul Hodges’ Chemicals and the Economy Blog
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By: Sheena Martin
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