Lower Crude Costs to Limit Upside in Gasoline Prices

By Brian L. Milne, Energy Editor, Schneider Electric

A 1.8-cent gain in the Energy Information Administration’s (EIA) U.S. retail price average for regular grade gasoline for the week-ended May 6 halted a string of weekly increases in the average that dated back to late February, while lifting the average off a 14-week low. At $3.538 gallon, EIA’s national gasoline price average is down 25.2 cents or 6.7% from the comparable year-ago period.

pumping gasLARGEThe average is now at the $3.53 gallon price point the EIA thinks it will average over the summer, defined from April through September, reported in their Short-term Energy Outlook for May. The projected average is down 10 cents from where the EIA thought it would be a month ago. For the full year, EIA estimates a $3.50 gallon national retail gasoline average, revised down 3.0 cents from April’s Outlook while 13 cents less than the 2012 average. The drop back in price estimates is seen spurred by declining crude oil costs, with lower gasoline prices expected into 2014, when the EIA expects gasoline would average $3.39 gallon.

View Schneider Electric’s Weekly and Historical Gasoline Price Index.

Brent crude futures, which trade on the IntercontinentalExchange, tumbled more than $20 per barrel from early February through mid-April, with the nearest delivered contract sliding from nearly $120 per barrel to below $97 a barrel. The contract, which is used in determining crude costs for gasoline in the United States, is again trading over $100 per barrel at roughly $103 a barrel early May 13.

Weak European demand for oil amid a contracting euro-zone economy is part of the reason for a lower Brent crude price, with Brent sourced in the North Sea. So is more oil available on the world market, with the Organization of the Petroleum Exporting Countries (OPEC) recently expanding production to a five-month high.

West Texas Intermediate crude oil futures listed on the New York Mercantile Exchange have traded at more than a $20 per barrel discount to Brent over the past year due to new shale oil production in the Midcontinent highlighted by Bakken crude in North Dakota and Eagle Ford crude in Texas. The Bakken crude, along with higher Canadian output encountered limited pipeline takeaway capacity to move the crude to market, which became bottlenecked at Cushing, Oklahoma, which serves as the delivery location for the NYMEX crude contract.

Thanks to new pipeline capacity and especially a sharp ramp up in rail deliveries of crude, that bottleneck is less of an issue, while this discounted crude is reaching market that pushes up its price. The Brent premium over crude is now below $10 a barrel, while Goldman Sachs said May 10 they think it would weaken to $5.50per barrel in June.

Sluggish economic growth since the Great Recession joined by greater fuel efficiency has dampened oil demand in the US. New oil finds due to better technology is now pushing supply levels higher, which will limit the upside for oil prices while also taming, to some extent, price volatility in the oil and gasoline markets in the coming months.

About the Author
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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