Bets that gasoline will fall below $1.40 by May 26 have risen almost 10-fold in a [image-nocss] month on the New York Mercantile Exchange (NYMEX). While a drop would hurt profits at Valero Energy Corp. and ConocoPhillips, the two biggest U.S. refiners, it would do little to help consumers. The U.S. Department of Energy forecasts pump prices of $2.21 a gallon on average this summer, little changed from today.
"We're in the final throes of the spring gasoline rally," Tom Knight, the trading director at Truman Arnold Cos., a distributor in Texarkana, Texas that sells almost 100 million gallons of oil products a month to the government, industrial users and retailers, told the news agency. "With refiners coming out of maintenance, we'll see refinery runs and production continue to inch higher."
Gasoline rose 112% from its December 24 low, compared with an average springtime gain of 80% during the past decade. This year's advance, the biggest among the main exchange-traded commodities, was helped by a 26% increase in crude oil and refinery shutdowns at San Antonio-based Valero and Paris-based Total SA.
Last year, gasoline futures peaked July 3 at a record $3.571 before plunging 78%. Gasoline for delivery next month settled at $1.6806 a gallon May 15 on the NYMEX. Open interest on $1.40 put options, which give the holder to right to sell gasoline at that price, has risen to 285 contracts from 29 on April 23. The option expires the day after Memorial Day.
The Memorial Day weekend, which starts May 23, is the traditional start of the summer driving season. Travel will rise 1.5%, AAA, the nation's biggest motoring organization, said May 12. The increase will be the first since a 27% gain in 2005. "It is a slight uptick," said Robert Darbelnet, CEO of AAA. "The bargains and the cheaper gas combined with the stressed-out consumer who is ready for a break will trump other concerns." (Click here for the full AAA report.)
Demand dropped 9.6% in 2008, extending the total decline from 2005 through 2008 to 28%. U.S. gasoline use will rise 0.7% to 9.073 million barrels a day this summer, as "continuing high unemployment constrains increases in driving activity," according to the Energy Information Administration of the Department of Energy. The EIA projected 0.2% growth for the full year.
Gasoline use contracted 1.2% in the four weeks ended May 8 from a year earlier, the EIA said May 13. The International Energy Agency cut its forecast for global oil consumption this year by 3% to 83.2 million barrels a day, the biggest decline since 1981.
(For more on margins and demand,click here to read the latest Lundberg Survey report in this issue of CSP Daily News.)
Speculation that the worst of the recession is over has helped push commodities higher, according to Knight. The Reuters/Jefferies CRB Index of 19 commodities rose 18% from this year's low on March 2.
Since February 18 the dollar has depreciated to 1.3495 against the euro from 1.2530. A further drop in the dollar could send gasoline to $1.85 a gallon, Knight said.
Increasing unemployment in the U.S. will curb demand for fuel, said Peyton Feltus, president of Randolph Risk Management in Dallas. Every 1% change in employment results in a 0.4% to 0.5% move in gasoline demand, he said. The U.S. jobless rate jumped to 8.9% in April and may rise to 9.1% this year, according to a Bloomberg survey of 58 economists.
As the economy slowed last year and demand for oil declined, the Organization of Petroleum Exporting Countries (OPEC) agreed to cut production by 4.2 million barrels a day, helping push prices up above $60 a barrel last week for the first time in six months. Prices declined as low as $32.40 on December 19 from a high of $147.27 on July 11.
Just as OPEC reduced output, refiners cut operating rates to 80.27% of capacity the week of April 10, the lowest level in 17 years, excluding periods when hurricanes forced plants to close.
Refining margins to turn crude oil into gasoline rose 43% to $14.25 a barrel on May 15, when the usage rate was 83.7%, from $9.962 on April 10, according to data compiled by Bloomberg.
Gasoline output should increase 3.7% this summer, more than twice the growth in demand, as refiners take advantage of wider profit margins, the EIA said.
The government anticipates margins of about $12.60 a barrel for April through September, compared with $8.40 a barrel last year, and refiners will increase rates to capture the higher returns, said Doug McIntyre, a senior Energy Department oil market analyst.
As margins rise, refiners have historically boosted production and increased supply, hurting profits, said McIntyre.
ConocoPhillips said that it expects to run its refineries in the second quarter in the low 90% range, the company said April 23, up from 80% in the first quarter. Valero estimated second-quarter rates between 82% and 85%, according to the report, citing company spokesperson Bill Day.
Valero said that it plans to resume full production at its 190,200 barrels-per-day Delaware refinery this month, returning about 11% of East Coast capacity to service after an unscheduled shutdown that began in March. Valero is expected to earn an adjusted 73 cents a share in the second quarter, down 47% from a year earlier, according to 15 analyst estimates compiled by Bloomberg. ConocoPhillips will post second-quarter adjusted net income of 68 cents a share, down 81%, according to 10 analyst estimates.
Both imports and increased ethanol blending with gasoline will boost supply, the report said. Refiners are mixing more ethanol into gasoline, taking advantage of a surplus of the biofuel. The amount of conventional gasoline blended with ethanol rose 27% during the week ended May 8 from a year ago, according to the Energy Department.
Ethanol for June delivery settled at $1.678 a gallon on May 15 on the Chicago Board of Trade. Refiners also receive a 45 cent-a-gallon tax credit for each gallon of ethanol they blend with gasoline, so the effective price of ethanol is $1.228.
U.S. gasoline imports are likely to rise this summer, after falling earlier this month because of lower European refinery production and increasing West African demand. Gasoline imports fell 18% in the week ended May 8 from a year earlier to 747,000 barrels a day, government data show.
"Europe will export to the U.S. as much gasoline as the U.S. will take," Andrew Reed, an analyst with Energy Security Analysis Inc., told Bloomberg. "Regardless of price, they will be looking to unload in the U.S."
His group projects an 845,000-bpd gasoline surplus between April and September in Europe, which means more shipments to the United States. In addition to the flow from Europe, new refineries in Asia will be looking for customers, he said. India's Reliance Industries Ltd. in December started a 580,000-bpd refinery in Jamnagar, with plans to export gasoline to the United States.
"Reliance and other new refineries will lead to a surplus of gasoline in Asia and they will have to find new markets," said Reed.
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