The national average retail price for a gallon of regular gasoline has fallen 36 cents per gallon over the last four weeks to hit $3.49 per gallon on November 5, the lowest price since mid-July. The decrease in retail gasoline prices has been a result of easing crude oil prices, narrowing gasoline crack spreads (the difference between wholesale gasoline and crude oil prices), and the switch in production from higher-cost summer-grade gasoline to lower-cost winter-grade gasoline. In its November Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts a continuing decline in retail gasoline prices through the end of this year (Figure 1). However, the effects of Hurricane Sandy on petroleum supply chains in the Northeast have added to the uncertainty of the forecast.
One driver behind the recent decrease in gasoline prices has been a decrease in the price of crude oil. After reaching a third-quarter high of more than $117 per barrel on September 14, the spot price of Brent crude oil fell to average $112 per barrel for the month of October. EIA expects global oil markets to continue to loosen as projected global liquid fuels production outpaces consumption by 0.1 million barrels per day in the fourth quarter, leading to global inventory builds. Much of the effect of this easing is already reflected in prices. EIA expects Brent spot prices to remain relatively flat through the end of the fourth quarter, averaging about $109 per barrel in both November and December.
In addition to lower crude oil prices, gasoline crack spreads have contracted significantly over the past month, helping to lower prices at the pump. In September, the differential between the refiners' wholesale price for motor gasoline and Brent hit a multiyear monthly average high of 54 cents per gallon, partially driven by the tight gasoline market on the West Coast (PADD 5) and refinery problems in Mexico and Venezuela. However, the switch in production from summer-grade gasoline to lower-cost winter-grade gasoline and an easing demand for refined products as consumption came off its third-quarter peak contributed to falling gasoline crack spreads. The crack spread fell 17 cents per gallon from September to an average of 37 cents per gallon in October. With crude oil prices expected to be relatively flat through the end of this year, a further decline in the crack spread is expected to be the main driver of lower retail gasoline prices. EIA expects the gasoline crack spread to average 18 cents per gallon in November and 15 cents per gallon in December. Because a significant portion of easing in the gasoline market is due to falling crack spreads on the West Coast, that region is expected to see the largest decrease in retail prices from their October levels, with prices projected to fall 56 cents per gallon to $3.68 per gallon in December.
The pace at which petroleum markets in the Northeast normalize in the wake of Hurricane Sandy injects additional uncertainty into this month's forecast. Price effects from the storm have been thus far fairly muted. Several regulatory waivers have been issued to ease supply constraints in the Northeast, helping mitigate some price pressures. However, the situation continues to develop and gasoline inventories in the Northeast are currently at relatively low levels; if supply disruptions linger longer than current expectations, it could push prices in the region higher. Currently, EIA is projecting prices on the East Coast (PADD 1) to average $3.43 per gallon in December, a decrease of 30 cents per gallon from October, which is slightly less than the 33-cent-per-gallon decline projected for the U.S. average price.
The Market Prices and Uncertainty Report that accompanies the November STEO provides a quantitative analysis of gasoline price uncertainty based on the price structure of futures and options traded for New York Harbor Reformulated Blendstock for Oxygenate Blending (RBOB).