2012 summer gasoline: The four-dollar question

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The question frequently posed by the news media as we head into summer, the peak driving season, is whether or not retail consumers will be paying more than $4 per gallon for regular gasoline when they fill up their tanks. While the national average retail price for regular gasoline still hovers just under that mark at $3.94 per gallon on April 9, in many areas this question has already been answered. Consumers on the West Coast have been paying more than $4 per gallon, on average, since the end of February. Likewise, retail prices in the Chicago area have averaged more than $4 per gallon for the past month. But other areas have prices still below $4 per gallon, such as the Rocky Mountain region, where prices averaged $3.79 per gallon on April 9, as refiners supplying that area have access to discounted land-locked crude oil.

The U.S. Energy Information Administration's (EIA) April 2012 Short-Term Energy and Summer Fuels Outlook (STEO) is forecasting that the monthly average national retail price of regular gasoline during 2012 will peak at $4.01 per gallon in May. If this forecast is realized, May prices would reflect the third highest monthly nominal average price on record after July 2008 and June 2008. For the summer as a whole (April through September) prices are forecast to average $3.95 per gallon, which is 6.3 percent higher than last summer's average of $3.71 per gallon.

Movements in retail gasoline prices are driven primarily by changes in both crude oil prices and wholesale margins (the difference between the wholesale gasoline price and the average U.S. refiner acquisition cost of crude oil [RAC]), which can be seen in Figure 1. Taxes and retail distribution costs do not vary that much. Crude oil prices have been the major factor impacting gasoline prices in recent years and continue to be the driver in the STEO. Higher crude oil prices account for the entire increase in EIA's 2012 summer forecast compared to 2011, as wholesale margins are expected to be virtually unchanged this summer compared to last.

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The market's expectation of uncertainty in monthly average gasoline prices is reflected in the pricing and implied volatility of futures and options contracts. New York Harbor reformulated gasoline blendstock for oxygenate blending (RBOB) futures contracts for June 2012 delivery over the 5-day period ending April 5, averaged $3.28 per gallon. The probability the RBOB futures price will exceed $3.35 per gallon (consistent with a U.S. average regular gasoline retail price above $4.00 per gallon in June 2012 is about 40 percent, while the probability it will exceed $3.85 per gallon (consistent with a U.S. average regular gasoline retail price above $4.50 per gallon) in June 2012 is about 5 percent.

Crude oil prices reflect both current market conditions and market participants' assessments of developments that could affect the future balance between supply and demand. World consumption fell with the economic downturn, but resumed growing after bottoming out in 2009 at 84.7 million barrels per day (bbl/d), rising 3.2 million bbl/d over the next two years to reach 87.9 million bbl/d in 2011. That growth was driven by developing countries and is not always appreciated in countries like the United States, where petroleum consumption fell and still remains well below its 2005 peak.

Crude oil supply has been subject to a variety of disruptions, including the Libyan disruption in early 2011, which, in the face of continuing world demand growth, supported price increases. More recently, crude oil prices have been influenced by concerns over geopolitical issues that have impacted, or have the potential to impact, supply flows from the Middle East and North Africa, a region that is critical to overall global supply of crude oil. At the same time, supply from countries outside of the Organization of the Petroleum Exporting Countries (OPEC) has had some setbacks recently, including production drops in South Sudan, Syria, Yemen, and the North Sea.

Looking ahead, assessments of the decline rate for existing crude oil production, prospects for projects that can add liquids production at new and existing fields both inside and outside of member countries of OPEC, and geopolitical developments that have the prospect to disrupt production and/or the flow of crude oil into the marketplace, are key factors that enter into views of the future supply situation. The refiner acquisition cost of crude oil is expected to average about $114 per barrel ($2.71 per gallon) this summer compared with the $104 per barrel ($2.49 per gallon) average of last summer - an increase of 22 cents per gallon.

Crude oil prices remain the largest source of uncertainty for gasoline prices this summer. Most of the uncertainties related to supply, including the deterioration in the geopolitical situation leading to new or intensified supply disruptions, delays in new non-OPEC projects, or decisions by OPEC members to hold production below forecasted levels pose upside risk to prices. Most downside risks to the price forecast come from demand uncertainties. If the pace of global economic growth fails to recover in OECD countries, or if economic growth slows in non-OECD countries, prices could be lower. (See STEO Market Price and Uncertainty Report for further discussion.)

Relative to crude oil prices, variations in the U.S. average refining margin have not contributed much to gasoline price changes since 2007. Wholesale gasoline price margins are affected mainly by local or regional factors. For example, the balance tightens seasonally as demand increases in spring through the peak summer driving months, adding pressure to the gasoline wholesale margins. Summer-specification gasoline is typically priced higher than winter gasoline, as it costs more to produce, which adds to the wholesale margin during the summer. In extreme cases, local supply disruptions such as from unplanned refinery or delivery outages can push up wholesale margins and product prices beyond any changes in crude oil prices. This occurred in early 2007, when unusually high refinery outages in the face of strong demand and weak imports drove wholesale gasoline margins up as seen in Figure 1. These types of imbalances are usually relatively short-lived and don't impact all regions.

Table 1 shows gasoline consumption fell 550,000 bbl/d (6 percent) between 2007 and 2011. Over the same period, the volume of ethanol in the gasoline pool rose by 439,000 bbl/d. These two factors alone could have pressured U.S. refiners to reduce production of refined gasoline and gasoline blending components by as much as one million bbl/d over that period, all else equal. However, imports fell 353,000 bbl/d and exports increased 382,000 bbl/d. Given the 735,000 bbl/d change in the gasoline trade balance from decreased imports and increased exports, U.S. refinery production only dropped 216,000 bbl/d.

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Currently, as we enter the driving season, total gasoline inventories are within their seasonally-typical range, indicating a normal balance between new supply (production and imports) and uses (consumption and exports). This implies typical seasonal pressures on wholesale margins as we move into the summer driving season.

Figure 2 shows average U.S. wholesale gasoline margins for the second quarter, which are illustrative of preparations for summer driving season, based on the average refiner acquisition cost of crude oil. From 2007-2011, the average second quarter wholesale margin was 52 cents per gallon. The April STEO is forecasting wholesale margins for second quarter of 2012 will average 61 cents per gallon, which is about seven cents more than the 2011 level. Excluding 2007 data, when heavy refinery outages left markets particularly strained, the second-quarter average from 2008-2011 was 42 cents per gallon. While the forecast for this spring is higher than that average, it is well below the levels seen in 2006 and 2007 when global consumption growth outpaced refining capacity and led to very tight product markets.



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