Gasoline's Global Game

Despite domestic supply boom, fuel prices dance to overseas demand

oil exports (CSP Daily News / / Convenience Store Petroleum)

NEW YORK -- It seems a contradiction. The United States is awash in crude oil. Refiners are ramping up exports as fuel demand continues to dampen domestically. And yet gasoline prices are already averaging higher than this same time last year, said The Wall Street Journal. The reason: Gasoline is global.

The growing production of crude oil in the United States from shale development has kept this country's crude prices low relative to world prices. But with fuel demand at home tepid, refiners have been increasing exports.

Infrastructure--the weak link in the U.S. fuel supply--is slowly being upgraded, with the southern branch of the Keystone XL pipeline open and now carrying crude oil that had been stockpiling in Oklahoma to Gulf Coast refiners. As this oil makes its way to refineries, and the fuels to the Southeast and the East Coast markets, more of it is also heading to other countries, including Mexico, the Netherlands and Brazil.

This has made the market for motor fuels more competitive, and exposed to demand from overseas and across the border, which has a potential impact on prices.

"Quite frankly, this is not just a U.S.-centric topic anymore," Nancy White, a spokesperson for AAA, told the Journal. "Production is going overseas, so that impacts the supply here, and that will drive prices up."

Citing figures from the Energy Information Administration (EIA), the newspaper said that gasoline stockpiles in the United States have hit their lowest point for this time of year since 2011. And as of this week, EIA reports that the nationwide average for regular gasoline is $3.68 per gallon, up more than 4% from the year prior, and the highest nationwide average since March 2013.

"Export demand is still growing," Jan Stuart, head of energy research at Credit Suisse, told the paper. He also said he expects demand in the United States to rise as the economy improves. He projects a 10-cent increase in gasoline futures on average in third-quarter vs. second-quarter 2014.

Some experts, however, believe the gasoline and crude oil price rallies have peaked. The EIA forecast the average nationwide price of gasoline to be $3.57 per gallon between April and September, which is one cent less than the same time period in 2013. AAA forecast an average of $3.55 to $3.75 per gallon for the summer, but prices could rise if crude-oil prices remain elevated.

As Daniel Lacalle, senior portfolio manager at London-based investment firm Ecofin said that unless the United States allows crude-oil exports, domestic prices will remain lower relative to international prices.

"The U.S. is a closed system where there is more oversupply of crude oil," Lacalle told the Journal. He expects U.S. West Texas Intermediate (WTI) prices to fall more below the Brent international price benchmark by the end of the year.

Yet other investors anticipate stronger-than-expected domestic gasoline demand this summer, citing the harsh winter of 2013/2014 as a reason for Americans' appetite for travel.

"The majority of the country ... had one of the fiercest winters that we've experienced in decades," said John McLane, president of commodities trading firm Mobius Asset Management in Scottsdale, Ariz. He told the paper that crude-oil prices could rise as high as $112 a barrel in the next two months in this scenario of higher domestic and global demand.

For now, however, expect U.S. gasoline prices to be tied more closely to global demand, said Jeff Currie, head of commodities research at Goldman Sachs.

"As long as you can refine that oil, turn it into product and export the product, you'll connect yourself to the global market," he told the paper.

Click here to read the complete Wall Street Journal report.