Look to the North Sea

Lundberg: Retail gasoline price rises to $3.51

CAMARILLO, Calif. -- In the past three weeks, the U.S. average retail price of regular grade increased 11.57 cents, to $3.5101 per gallon, according to the most recent Lundberg Survey of approximately 2,500 U.S. gas stations. On a weekly equivalent basis, this is a slightly higher rate than in the prior two-week period.

To see the causes, first we must eliminate the gasoline market. Gasoline alone could not have hiked its price by nearly four cents weekly: Demand is down; stocks are up; and U.S. refiners are sitting on a large cushion of unused capacity. There is neither a shortage of gasoline nor tight refining capacity. Exports of gasoline did not bring this price rise, nor did recent plant closures. Our surplus refining capacity attests to that. And seasonal changes in formulations, which haven't happened yet, did not cause this price rise.

That leaves crude oil as the cause. But not domestic crude. The most common U.S. benchmark, West Texas Intermediate (WTI), moved up just 21 cents per barrel over the three weeks. WTI remains glutted and therefore desensitized to world oil market dynamics.

But North Sea Brent, nearly as high quality at WTI, is vibrating from reduced North Sea output, and from Sudan crude blocked by conflict between South Sudan and Sudan and arguably from Iran/Middle East tensions more than WTI is. Brent's near-month price increased $7.45 per barrel during the past three weeks. Far beyond our shores, a grade of crude nearly as light and sweet as WTI is playing a big role in higher U.S. pump prices.

Assuming no further oil price surge right now, we may still see a bit more rise at the pump because retail margin has been slashed. On average, regular grade margin is barely more than seven cents per gallon, versus more than 10 cents three weeks ago, so there is pressure on retailers to get well.

Despite the upcoming embargo by Europe of Iranian oil and Iran's threats to close the Strait of Hormuz, and despite upcoming further closures of U.S. refineries, U.S. refiners exporting gasoline, and the fact that retail price runups in the spring are common over the years, there is no reason to expect extreme gasoline price hikes this spring and summer--unless we assume crude oil prices will zoom.

That regular grade has reached $3.51 in mid-February is not a harbinger of a spring price panic. As crude is about 70% of the pump price, and no gasoline supply issues loom, crude will be the overwhelming determinant of the price path of retail gasoline.

Camarillo, Calif.-based Lundberg Survey Inc. is an independent market research company specializing in the U.S. petroleum marketing and related industries.

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