Meanwhile, the Energy Information Administration (EIA) just reported that the average price per gallon of gasoline grew for the third consecutive week, while diesel prices leapt 10 cents.
"It is kind of curious that we have supply overhangs but prices are moving higher," said Telvent DTN's refined fuels editor, Brian Milne, during a webcast last week titled, "[image-nocss] How Will the Imbalance of Supply & Demand Impact Price." But market dynamics tend to be complex, he noted.
"As demand has been contracted this year because of the recession, you have refiners lowering their production rate, trying to match up supply and demand," Milne said. "The discipline limited the downside on prices earlier in the year, and it's supporting higher prices now."
Refiners are continuing a precarious supply-demand balancing act in an attempt to gain more margin, as crack spreadsthe price of crude oil minus the price of end productreached a 10-month low as recently as late September for gasoline. While the crack spread has bounced back somewhat, it will continue to be an obsession for U.S. refiners going into 2010.
"As we start seeing capacity shrinkage, what that could mean is... a period of times where there's not as much available supply," said Milne. "You could even see terminals on allocation or something of that nature briefly because you have less production sources."
Meanwhile, capacity is growing overseas as refineries in China, India and other countries come online.
"If we start seeing a great amount of imports, we could see a [domestic] refinery cutting back on output because there's too much supply," said Milne, "and you can see imports coming. That may not match up properly. You can see brief periods where you have too much, too little supply, allocations at terminals. Price volatility will play into this. You have uncertainty."
Terminals on the East Coast, which draw much of their supply from imports, could see the greatest supply issues.
Other wild cards in the fuel supply-demand dynamic include:
Gross domestic product (GDP). Diesel demandand ultimately, pricehas been closely linked with the rise and fall of GDP. And diesel demand is also considered a measure of the economy's health, since the fuel is the lifeblood of the industrial and commercial sectors. When the Commerce Department recently reported that the third quarter saw GDP rise 3.5%, crude oil prices leapt $1. "With the GDP levels, the market may get ahead of itself and push prices up, even if demand is not climbing with it," noted Milne. If GDP continues to climb, diesel demand should follow. However, a good barometer of diesel demandtrucking companieshave been reporting only slight or no improvement in demand.
The U.S. dollar. "Last week, the U.S. dollar fell to a 14-month low," reported Milne. "At the same time, crude oil rallied to a 1-year high, so clearly these prices are related." Many economists are bearish about the prospects of the dollar. However, because inflation has not yet emerged, many wonder whether the dollar has hit bottom. "If the dollar has bottomed and starts getting stronger, that will pressure crude oil prices." Milne believes crude oilat $82 a barrel as of last weekhas "potential" to hit $90. "Prices at this level, however, threaten overall growth of the U.S. economy," he warned, "and we can see selling as a result." He predicts oil will settle between $70 and $85 through the fourth quarter of 2009 and into the first quarter of 2010.
Demand and unemployment levels. "Higher unemployment will limit demand for both gas and diesel," said Milne. With the national unemployment rate hovering just under 10%and varying widely throughout the countryit's one of the last metrics to budge as the government watches for signs of economic recovery. Year-to-date, gasoline demand has risen only 0.2%, according to EIA. At the same time, Federal Highway Administration numbers show total annual-vehicle-miles-traveled rose slightly, although the Northeast and Midwest saw declines.
With this dizzying array of dynamics in mind, on which numbers should marketers focus? National supply and demand figures suggest an overall price direction, Milne said, making them important to track. That being said, marketers would be wise to examine local supply and demand numbers, and look at historical consumption trends for their area. "You are looking in a rearview mirror, but that should give you some clues on how to proceed going forward," he said. "If you're in a hard-hit area, just be cautious on buying too much supply going forward. You may be on the hook for it."
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