Pedal On The Floor Rally Speeds Retail Gasoline Price Gains

By Brian L. Milne

If history remains a trusted guide, we should expect another eight weeks of increases in retail gasoline prices before the advance stalls at which point we might have reached the annual high for 2013.

That might be difficult to imagine, especially when we consider the U.S. retail gasoline price average just shot up more than 5% during the week-ended Feb. 4, with the 18.1-cents increase pushing the Energy Information Administration’s national average to a better than three-month high at $3.538 gallon.

In 2012, EIA’s U.S. average for regular grade gasoline sold at retail outlets jumped 45.9-cents or 13.2% from early February to early April when it set the 2012 high at $3.941 gallon. If we mirror that move this year, the average would be knocking at $4 gallon on April Fool’s Day at $3.997 gallon, averaging a weekly gain at 5.7 cents.

Directionally, we are in the seasonal uptrend for gasoline prices amid refinery maintenance programs that reduce the amount of crude oil converted into gasoline as well as ratcheting down Reid vapor pressure ratings for gasoline, which refer to emissions released into the atmosphere. Environmental regulations require RVP levels to become more stringent, a lower RVP, when the weather warms, with several wholesale markets at the early stages in making these adjustments. Reducing RVPs adds to the cost in manufacturing gasoline.

There are, of course, the various uncertainties that can drive wholesale gasoline costs in either direction. How the market reacts to the Port Reading refinery closure by Hess Corp. at month’s end is one of those uncertainties. Despite the New Jersey refinery’s small 70,000 bpd size, its location in the New York Harbor could prompt a meaningful market response to the upside in futures trading, even if only short term, as the market adjusts to the roughly 50,000 bpd of lost gasoline supply.

Longer-term, the Port Reading refinery would have little effect. Yet, the refinery’s location in the NYH where the New York Mercantile Exchange’s gasoline futures contract—the Reformulated Blendstock for Oxygenate Blending contract or RBOB, takes delivery gives it more importance.

In 2012, about a third of the gasoline supplied in the NYH market is produced from refineries within the region, with another third of the supply sourced from imports. Ethanol accounted for 10% of the supply, while the majority of the remaining balance is supplied from outside the region, mostly the Gulf Coast, which is piped in. There is limited space on the Colonial Pipeline, the main conduit in shipping gasoline to the region from the Gulf Coast, and limited Jones Act ships to hike waterborne shipments from other U.S. refineries. Imports to the region are seen making up for the shortfall caused by the Port Reading closure.

There’s a great deal of speculation that gasoline prices would continue higher from here following an 11.3% jump in the number of net-long NYMEX RBOB futures contracts are held by noncommercial participants through Feb. 5, which reached the third highest all-time net-long position held by the speculator class. Open interest is at a 10-month high, highlighting the market’s focus on gasoline. It also signals that, at least in the short term, we will see gasoline prices move higher.

Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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