WALL, N.J. -- About two months ago, I predicted a 15- to 40-cent increase per gallon in U.S. motor-fuel prices by Easter Sunday. Invoking the metaphor of a pizza, I mentioned eight separate components “or slices” for a traditional spring price rally.
Fast forward to this week, and you’ll indeed find that U.S. retail gas prices are about 32 cents per gallon higher than the $3.31 per gallon national average recorded when the predictive story ran on Feb. 12. Wholesale gasoline costs are up 30 to 42 cents per gallon in most regions in the 70 days since the prophesy was rendered, so there is still some ongoing “catch-up” at work on the street.
This week I’d like to cite nine new elements that suggest the current spring rally may flatten out or even reverse course a bit in May. In no particular order, here are the nine factors that should evoke pause even as all but a handful of U.S. states flirt with 20- to 30-cent increases vs. late April 2013 numbers.
A Bubbling Crude: Notwithstanding some of the highest oil inventories ever recorded stateside, U.S. crude-oil prices have been mostly above $100 per barrel recently. U.S. production recently surpassed 8.3-million barrels per day, representing a 313-month high. Better weather in the second quarter should bolster some of the growing “tight oil” production that is part of the shale-oil boom, and prices are currently some $5 or $10 per barrel above the expectations of always-bullish investment banks.
Speculative Futures’ Froth: NYMEX futures’ markets find less participation than they’ve seen in recent years, but that hasn’t stopped huge financial “funds” from embracing crude oil and RBOB futures with irrational exuberance. Data from the Commodity Futures Trading Commission (CFTC) released last week show that there is about $45-billion more money “bet” on higher price outcomes for WTI, and a similarly robust $10-billion skew of fund money hoping for appreciation in RBOB futures and options. The bullish sentiment is somewhat extreme, and the numbers warn that there are very few big money buyers who have not yet rode the rally.
History: The average winter-to-spring gasoline futures rally in the last 30 years has presented a 57% appreciation in price, but that number seems excessive when viewed in the context of robust U.S. refining capability. The 2013 spring futures’ rally topped out with a 27% advance, and gasoline futures are now up nearly 25% from the November low. Further increases should make futures’ participants nervous, and market history finds second-quarter peaks typically followed by rapid declines of 30 cents per gallon or more.
Profits: April has delivered renaissance-level profits for many refiners, so there is incredible motive to manufacture gasoline, even if production comes at the expense of diesel. East Coast refiners who run North Dakota crude are seeing gross margins of nearly $25 per barrel this week, and even the most disadvantaged regional refiners are selling gasoline for $15 per barrel over their feedstock costs. These widening margins reflect a stunning recovery from some of the depressed winter gasoline profits.
Tougher Demand “Comps”: Gasoline demand last February and March showed attrition vs. the previous year, while April and May 2013 were flat to 2012. But demand surged in the true driving season with regular weekly occurrences of 9 million barrels per day or more. Those numbers may be more difficult to top this year, with the turnover of the aging light-vehicle fleet still quite brisk.
The End of Refinery Maintenance: The first four months of 2013 brought especially extensive refinery turnarounds, particularly at the Gulf Coast. A few large plants in Louisiana, Texas and California have some May maintenance but the end of peak refinery work is in sight through most of the U.S. geography.
Stays of Execution: Petroleum analysts still believe that some non-U.S. refiners in the North Atlantic face closure, but the robust rally in light products pushes European or Canadian refinery closures into late 2014 or even 2015. Those plants will contribute some gasoline to East Coast ports.
Just-In-Time Inventory: Tight U.S. storage capability is a two-sided coin. Inventories are very quick to empty, as one can see by sporadic outages witnessed this spring in markets like Memphis and Florida. But inventories are also quick to fill, and with most of the distribution system now switched to summer fuel blends, a rebound in gasoline stocks seems likely.
Cheaper Ethanol: The 2014 spike in ethanol prices temporarily added 5 to 12cents per gallon to the cost of finished gasoline. But ethanol prices are now $1 to $1.25 per gallon below the peak numbers of early April, so adding ethanol to hydrocarbons can cheapen the price by a few pennies or more. Most signs suggest that output will be robust, and traders believe that logistics’ snags are mostly in the rearview mirror.
The trick here is that none of these nine factors reigns supreme, and market “timers” can be punished by a tendency for rational markets to behave irrationally in the second quarter. But wholesale and retail prices may be significantly higher on Cinco de Mayo than Memorial Day weekend, with the next less predictable phase coming in late summer when hurricanes can have a dramatic impact.