GasBuddy

 

A More Expensive Slice of Gasoline “Pie” Lies Ahead

Posted in: Gas Prices, by Tom Kloza on Feb 12, 2014 12:00 PM

 

As a thought experiment, consider the 2014 motor fuel market a pizza, divided
conveniently into eight slices. If you stretch the metaphor, U.S. consumers have
completed the cheapest slice of winter pie since 2010. But GasBuddy predicts that
some much more expensive slice of gasoline pricing is imminent, with pump prices
likely to jump some 15-40cts gal between now and Easter Sunday.


With two days left in the first eighth of 2014, GasBuddy calculates that regular gas will
average less than $3.30 gal for the period, the cheapest opening 45 days since 2010.
Currently, the national year-to-date average thus far into the year sits about 6cts gal
below the same time period last year.


Gasoline is likely to be considerably more expensive over the next 45 days. There are
traditional and entirely new updrafts propelling motor fuel higher, and they conveniently
add up to eight slices of concern. Here are the items that GasBuddy analysts believe
will contribute to higher prices as the days get longer in North America:


Historical Precedent: Gasoline futures bottomed at $2.495 gal in early November. The
average winter-to-spring futures’ rally in the last 30 years has been 57 percent, targeting
a gasoline futures price rise of over $1.40 gal. GasBuddy believes that the 2014 rally
will be well below that average increase, but even a modest 25% rally in futures would
target NYMEX RBOB levels above $3.10 gal, implying another 35cts gal or more of
upside.


Specifications: The winter-to-summer shift in vapor pressure has already lifted some
California spot gasoline markets and the switch implies a 15-20cts gal increase as other
East of the Rockies’ locations make the shift in March and April. Reformulated cities in
the northeast are the locations most susceptible to the greatest consequences of
specification shifts.


Imports: European refiners have struggled with much higher crude and natural gas
costs than U.S. refiners. Accordingly, much less foreign gasoline now makes the
transatlantic journey to the East coast of the U.S. Much of the gasoline that can meet
tough U.S. summer reformulated specifications is likely to stay abroad.


Maintenance: An extensive refinery “turnaround” schedule has just commenced at the
U.S. Gulf Coast, with very light work on the docket in the Midwest. The northeast,
already finds two huge Delaware River refineries down for maintenance, and the largest
offshore contributor to U.S. reformulated gasoline is the Irving refinery in St. John, New
Brunswick. That plant will be down for extensive maintenance in late February and most
of March.


Exports: U.S. Gulf Coast refiners now commonly provide cargoes of gasoline to Central
and South America as well as Africa, and West Coast refiners recently sent record
amounts of motor fuel to Asia. The cost of shipping gasoline to foreign countries is a
fraction of the fees that companies encounter when they move product from port-to-port
stateside.


Speculators: Gasoline has yet to catch the fancy of speculators, but hedge funds,
banks, and large speculative trading houses love seasonal momentum plays. The last
report from the Commodity Futures Trading Commission (CFTC) showed speculative
buyers outnumbering speculative sellers by about 41.6-million barrels. That might seem
like a large “bullish bet” on gasoline, but it is less than 45 percent of the bullish
speculative stance one year ago, and about half of the bullish holdings reached in 2011
and 2012. GasBuddy suspects that speculative money will embrace gasoline futures in
coming weeks.


Pent-Up Demand: There’s no denying that year-to-date motor fuel demand has been
poor, but it can clearly be blamed on inclement weather. U.S. demand numbers should
appear favorable when year-on-year comparisons are rendered during the next six
weeks. A year ago, the weekly reports from the Energy Information Administration
showed late February and March demand levels of about 8.46-million barrels per day.
GasBuddy anticipates a very lumpy 2014 for demand, but projects that demand later
this quarter could certainly top 8.6-million barrels per day.


Inventories: Current U.S. gasoline stocks are just under 235-million barrels, about 1-
million barrels above early February last year, and about 5-million barrels higher than
five year average levels. But winter gasoline is “perishable” and can actually clog the
distribution system. EIA reports don’t delineate how much gas meets spring and
summer specifications, and there is always concern that the market will have too much
old gas, and too little on-spec material.


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE
FOR EVERYONE. OPTIONS, CASH AND FUTURES MARKETS ARE SEPARATE AND DISTINCT AND DO NOT
NECESSARILY RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE
CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES & OPTIONS
CONTRACT BEING OFFERED. SEASONAL DEMAND AND CURRENT NEWS IN COMMODITIES ARE
ALREADY REFLECTED IN THE PRICE OF THE UNDERLYING FUTURES.