Wholesale Gasoline Costs Still Moving Through Supply Chain

The Energy Information Administration reported a 0.5 cents decline in the U.S. retail gasoline price average for regular grade as of March 21, but at $3.562 gallon, that’s likely little consolation for American drivers. Moreover, the average will again move higher after this brief rest stop, with wholesale costs still moving through the supply chain.

An EIA study done a few years back remains relevant, analysts there said. In their weekly report on the market they highlighted this issue, saying it takes roughly eight weeks for the full increase in crude prices to work through the system. Approximately half of the increase reaches pump prices within two weeks. EIA also calculated that every $10 bbl increase in the price of crude will translate into a 24 cents increase in the per gallon cost of gasoline.

New York Mercantile Exchange crude oil futures, the US price benchmark, reached a 2-1/2 year high at $106.95 barrel on March 7 and, since then, slumped to a $96.22 barrel low on March 16, which is the current low for March. On March 24, the contract had rallied back above $100 barrel to $106.69 barrel while ending last week at $105.54 barrel.

Meanwhile, wholesale gasoline costs moved higher across the country last week, climbing alongside the advance by crude futures. Gasoline prices trading on NYMEX, while the futures contract called RBOB for Reformulated Blendstock for Oxygenate Blending also found additional support from bullish weekly data released on March 23 by the EIA that showed a sharp increase in implied demand and big drop in domestic supply levels.

Increased DemandFor demand, EIA’s preliminary data shows year-on-year growth through March 18 0.8% higher than during the comparable period in 2010. The data also showed acceleration in that growth, with the four-week average through March 18 up 1.2% against a year ago.

What really caught the market’s attention was, however, a steep 5.3 million barrel drawdown in U.S. commercial gasoline inventory, which is now 2.2% less than a year ago at this time. Moreover, gasoline stocks tumbled 21.4 million barrel or 8.9% from a 21-year high registered on Feb. 11, and are now near the five-year average.

Another factor to consider is that gasoline prices historically move higher from winter into spring, as the market anticipates increased demand as the weather warms. Traditionally, RBOB futures will reach a high in late April, early May, and then ease into early July before again climbing.

Considering the plethora of world events, from civil war in Libya, a member of the Organization of the Petroleum Exporting Countries, and protests spreading throughout the oil rich Middle East while Japan continues to contend with two natural disasters and an ongoing nuclear crisis, the seasonal pattern could be upended. Uncertainty reins, but the risk is that gasoline prices will move even higher in the second quarter.

About the AuthorBrian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 15 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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