WALL, N.J. -- As a thought experiment, consider the 2014 motor-fuel market a pizza, divided conveniently into eight slices. If you stretch the metaphor, U.S. consumers have completed the cheapest slice of winter pie since 2010. GasBuddy predicts that when the final numbers are calculated for the first eighth of 2014, the aggregate average unleaded regular price will be considerably under $3.30 per gallon.
The same slice of time in 2013, 2012 and 2011 produced average U.S. motor-fuel prices of $3.49/gallon, $3.60 and $3.51, respectively.
However, GasBuddy analysts believe that the next “slice” of 2014 gasoline prices will be considerably more expensive. There are traditional and entirely new updrafts for gasoline futures in particular. Here are eight factors, or “slices” of the analytical pie, that could contribute to a headline-grabbing first-quarter rally for motor fuel:
Historical Precedent: Gasoline futures had an offseason bottom of $2.495/gallon in early November. The average winter-to-spring rally in the last 30 years has been 57%, targeting a gasoline futures’ rise of over $1.40/gallon. GasBuddy believes that the 2014 rally will be well below average, but even a modest 25% rally would target NYMEX RBOB levels above $3.10/gallon, implying another 35 cents per gallon of upside.
Specifications: The winter-to-summer shift in vapor pressure has already lifted some California spot markets, and the switch implies a 15-to-20-cent-per-gallon increase as other East of the Rockies’ markets make the shift in March and April. Reformulated cities in the northeast are the locations most susceptible to this updraft.
Imports: European refiners have struggled with much higher crude and natural gas costs than U.S. refiners. A multi-month trend has seen much less gasoline make a transatlantic journey as spring approaches. Much of the gasoline that can meet tough U.S. summer RBOB specifications is likely to stay abroad.
Maintenance: A normal refinery “turnaround” schedule is on tap at the U.S. Gulf Coast, with very light work on the docket in the Midwest. The northeast, however, already finds two huge Delaware River refineries down for maintenance, and the largest offshore contributor to U.S. reformulated gasoline is the Irving refinery in St. John, New Brunswick. That plant will be down for extensive maintenance in late February and most of March.
Exports: Gulf Coast refiners commonly provide cargoes of gasoline to Central and South America, as well as Africa, and West Coast refiners recently sent record amounts of motor fuel to Asia. The cost of shipping gasoline to foreign countries is a fraction of the fees that companies encounter when they move product from port-to-port stateside.
Speculators: Gasoline has yet to catch the fancy of speculators, but hedge funds, banks and large speculative trading houses love seasonal momentum plays. The last report from the Commodity Futures Trading Commission (CFTC) showed speculative buyers outnumbering speculative sellers by about 41.6 million barrels. That might seem like a large “bullish bet” on gasoline, but it is less than 45% of the bullish speculative stance one year ago, and about half of the peaks seen in 2011 and 2012. GasBuddy suspects that speculative money will embrace gasoline futures in coming weeks.
Pent-Up Demand: There’s no denying that year-to-date motor-fuel demand has been poor, but it can clearly be blamed on inclement weather. It should be easy to achieve favorable year-on-year comparisons in the next six weeks, given that demand in that period in 2013 was poor. Weekly reports from the Energy Information Administration in 2013 showed late February and March demand levels of about 8.46 million barrels per day. GasBuddy anticipates a very lumpy 2014 for demand, but projects that demand later this quarter could certainly top 8.6 million barrels per day.
Inventories:Current U.S. gasoline stocks are just under 235 million barrels, about 1 million barrels above early February last year, and about 5 million barrels higher than five-year-average levels. But winter gasoline is “perishable” and can clog the base paths of distribution. EIA reports don’t delineate how much gas meets spring and summer specifications, and there is always concern that the market will have too much old gas and too little on-spec material.
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