OUTLOOK '12: Growing demand, supply weigh on US gasoline

06 January 2012 21:02  [Source: ICIS news]

HOUSTON (ICIS)--The stronger US economy and geopolitical fears could push 2012 gasoline above $4/gal, although any pressure pushing up prices could be offset by fuel-efficiency standards, higher supplies and releases from the nation's Strategic Petroleum Reserve.

The record average retail gasoline price is $4.11/gal, set in June 2008. The peak price in 2011 was $3.98/gal in mid-May.

“I don’t think we're going to see $4 a gallon unless we see a major disruption in supply or threat to supply,” said analyst Phil Flynn with PFGBest.

Flynn said gasoline prices would need a significant boost to reach $4/gal.

“There are still some risks out there, but I’m hopeful prices will remain low,” said Flynn. “By next summer, assuming there aren’t any other wars, prices will be lower [than 2011], even if demand is stronger.”

Analyst Stephen Schork, author of the Schork Report, said $4/gal gasoline is not impossible given the improving economy. Plus, gasoline prices were kept artificially low in 2011 because of the release from the Strategic Petroleum Reserve.

Independent analyst Bob van der Valk agreed. “We will be starting the new year with the average price for gasoline $1/gal higher than we were at the beginning of [2011].”

The higher demand from the economic upturn will be met by rising domestic oil supplies. A drop in demand by fuel efficient vehicles and pressures to keep prices low during an election year could be countered by geopolitical concerns and increased supplies, analysts said.

On the demand side, the US economy seems to be stabilising with signs of economic growth, Schork said.

Flynn said with interest rates remaining low and additional stimulus in the system, demand will be bullish in 2012.

Recently, the US unemployment rate reached a multi-year low of 8.5%.

As demand potentially increases, supply could rise to meet those needs.

The reversal of the Seaway Pipeline to bring West Texas Intermediate (WTI) and heavy Canadian crude to the US Gulf will ultimately mean lower prices, Flynn said.

The availability of more oil will translate to continued exports of gasoline.

The US Energy Information Administration (EIA) reported that the nation was exporting 536,000 bbl/day of motor gasoline during the week of 14 October. This was the highest level since reporting on exports began in June 2010.

The role as a net exporter of gasoline for the US is counter to historical trends, but the new role is expected to stick, Flynn said.

Lower demand caused by fuel-efficiency standards should also encourage exports, Flynn said.

“I believe with the progression towards higher fuel efficiency in motor vehicles and considering the market saturation for vehicles in the US, we’ll see overall demand continue to fall in the years ahead,” said analyst Patrick DeHaan of GasBuddy.com.

As of early December 2011, the year’s average US retail gasoline price was $3.28/gal.

There are arguments that the price for 2011 was artificially suppressed.

Schork said prices were kept low by the release of 30m bbl of oil from the US Strategic Petroleum Reserve (SPR), a decision he described as politically motivated. The concern is that the temptation to release more oil from the reserve will grow exponentially, since it kept prices low in 2011, he said.

“I think for the price of gas, this could be one of the most significant presidential elections in recent history,” Flynn said.

Flynn said if President Barack Obama wins the 2012 presidential election, the green energy lobby will celebrate. If a Republican gets into the White House, the opposite will happen, he said.

Former-president Bill Clinton opened up the Strategic Petroleum Reserve twice in 1996 and 2000. Schork also described those releases as political, but it helped curtail gasoline prices.

By: Sheena Martin
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