WASHINGTON -- The recovery in gasoline prices may begin to sputter as U.S. refiners ramp up their output of the motor fuel, reported The Wall Street Journal.
U.S. gasoline demand has been choppy in recent weeks and remains closely aligned with production of 8.9 million barrels a day, according to the latest official government data. To be more exact, consumption is outpacing supply by 62,000 barrels a day, the narrowest such margin since March 1977. Imports and stored fuel make up the balance.
Refiners' enthusiasm is creating a bump in the road to $3 a gallon [image-nocss] at the pump, the newspaper reported. Many analysts, as well as the federal Energy Information Administration, expect the average U.S. price of regular gasoline to surpass $3 this summer for the first time since the recession hit.
According to the AAA Daily Fuel Gauge Report, the average per-gallon retail price dipped for a fourth straight day to $2.811 a gallon, the longest losing streak since mid-February. Gasoline futures on the New York Mercantile Exchange for April delivery, after settling 0.5% lower on Friday at $2.2074 a gallon, are cheaper than those for May delivery, a sign that markets are well-supplied in the short term.
Gasoline prices are being closely watched because they can provide clues to the resilience of the economic recovery. Prices usually rise ahead of summer, when U.S. drivers traditionally hit the road for vacation.
Refiners are betting on a sustained recovery by boosting gasoline output to the highest springtime pace ever. The companies are taking advantage of the higher profits on gasoline that came about because several plants have either closed their gates or idled gasoline-producing units.
"For the first time in a very long time, we've had a great deal of spare refining capacity and refiners have been able to swap in and out of units," Peter Beutel, president of Cameron Hanover in New Canaan, Conn., told the newspaper. That extra capacity now may help tamp down prices amid any flare-ups in demand, or weigh on prices if demand stays sluggish.
Inventories are already keeping a lid on prices. Gasoline stockpiles were at 224.6 million barrels as of March 19, on pace to reach its highest end-March level in 17 years.
Increased use of ethanol, which is blended with other components to manufacture cleaner-burning fuel, is expected to essentially make already-high gasoline inventories stretch even further. The amount of ethanol blended into gasoline, which averaged 700,000 barrels a day in 2009, will rise by 100,000 barrels a day this summer thanks to new federal regulations, said Tancred Lidderdale, an analyst with the EIA.
What's unclear is how gasoline imports will alter the supply-and-demand picture. Imports typically meet about 13% of peak-season demand, averaging about 1.2 million barrels a day in the past five years. March imports are nearly 40% below the five-year average, which has helped limit what has still been a large inventory buildup.
Analysts expect imports to rise to typical summer levels, with a potential twist. India's giant refiner, Reliance Industries Ltd., has acquired about 1.2 million barrels of storage in the Bahamas, and has its eye on the U.S. gasoline market.
"If we suddenly get imports coming in a major way, there's a chance we could be sitting on a mountain of gasoline," Beutel said. "There are some real wild cards and potential for more volatility."
For more information on how refiners are reacting to volume decline, watch for "Crude Awakenings" in the April 2010 issue of CSP magazine.
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