Gasoline to Crude: Uncle!

Lundberg reports street prices jump up a dime as supply "glut" continues

Angel Abcede, Senior Editor/Tobacco, CSP

CAMARILLO, Calif. -- Months of a challenging refining environment and a "glut" of refined products have had relatively little affect on the price of fuel at the pump, but recent price hikes suggest that may be changing as spring approaches. On March 5, the U.S. average retail price of regular grade petroleum was $2.7279 per gallon, up 9.58 cents since February 19, according to the most recentLundberg Survey of approximately 5,000 U.S. gas stations.

The jump is nearly the same amount that the price fell during [image-nocss] the prior six weeks. The major culprit is crude oil, said Lundberg officials. When crude rose $9 per barrel during from February 5 to February 19, to $79.81, the average retail gasoline price continued to fall. Gasoline at the time did not want to rise, Lundberg said. Refiners and retailers lost margin as they lagged in passing through hikes to avoid scaring off gasoline demand further.

But two weeks later, crude oil has reached $81.50 and gasoline prices were forced up, beginning their passthrough; however, margin recovery for refiners and retailers was very limited, according to Lundberg.

The passthrough at the pump is not complete, Lundberg said. From here, if crude does notslip back quickly, retail prices will continue rising. Margin recovery by either retailers, refiners or both, would add to the price climb on the street.

At the same time, the refined-products glut continues, officials said, noting that rising seasonal gasoline demand isn notlikely to be strong enough to soak it up. Continued weak sales would place even more pressure on downstream margins to widen.

Motorists, gasoline retailers and jobbers are all feeling the pain of current economic conditions, most obviously in weakened gasoline demand and unemployment. But it is the refining sector that is hurting the most, Lundberg said. More than 18% of U.S. capacity is idled, some plants have permanently closed, and even with that the March 5 refining margin on gasoline is just 24.91 cents per gallon. They are caught between inflated crude oil prices, thanks to investors fleeing weak currencies in favor of commodities, and low sales volumes. The country is setting itself up for potentially deeper dependence on imported gasoline, said Lundberg, with fewer domestic options to feed the national gasoline distribution system.

CSP has been following the recent margin problems hitting the refinery sector and what affect the downturn may have retailers. Opinion runs both ways. Some executives note how refiners are trying to improve margins in part by cutting back on production, which on one hand will help their finances, but on the other, may cause increased volatility.

"If [refinery] runs continue to stay low, that will drive prices higher and may cause some supply disruptions," Andy Milton, vice president of supply, Mansfield Oil Co.,Gainesville, Ga., told CSP Daily News. "But if you keep cutting production and at some point, you get to a breaking point."

Others believe the refinery woes will not influence gasoline prices all that significantly this summer. "Sluggish demand trends should be offset by a heavier-than-normal turnaround schedule for refiners in the Gulf Coast, Midwest U.S. and northwest Europe, [which will lead to] a moderate margin environment for the refining industry," said Matt Tormollen, CEO of FuelQuest Inc., Houston, who validates recent price movements. "The major wild cards will still be oil prices and weather. If oil stays in its current $75 to $80 range, consumers should be looking at Gulf Coast gasoline prices of $2.70 to $2.90."

For more on how refinery losses and shut downs may affect fuel pricing along the supply chain, watch for the April issue of CSP magazine.

Angel Abcede, CSP/Winsight By Angel Abcede, Senior Editor/Tobacco, CSP
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