I’ve been saying for some time that U.S. gasoline prices are “sloppy drunk” and it finally appears that they are about to go into rehab. The next 40 days or so represents the best chance to get healthy on the supply front and that should be accompanied by relief at the pump, particularly in the markets that have attained the highest blood alcohol levels.
Street prices have now given back 3cts gal since they peaked on May 24. The national average stands today at $3.197 gal, compared to the $3.227 gal record six days ago. The relief isn’t enough to for drivers to pool their savings and visit the local Patek Philippe shop, but it is welcome and the retail downtrend should persist into June. We now have two states - - New Jersey and South Carolina - - -with average prices under $3.00 gal, and that small group should swell with the addition of Mississippi, Tennessee, Texas, and Virginia at sub-$3.00 gal levels by next Monday.
Where are the $4.00 gal media hounds at the moment? I suspect that many of them are licking their wounds since the $4.00 gal average target that they viewed as a certainty may have reflected personal or client investment strategies. If you listened to the rhetoric less than two weeks ago, you would have concluded that portions of the United States were headed toward a Mad Max or Road Warrior movie scenario, where fuel transports would be hijacked across the country. I find special irony when I think of Mel Gibson - - perhaps Hollywood’s most famous sloppy drunk - - hypothetically commandeering tankers across the countryside.
Where do we go from here? Let’s take a look at wholesale price trends, which represent the live picture that ultimately manifests itself on the street on a tape-delayed basis.
Wholesale or spot gasoline prices are down anywhere from 16-48cts gal from the peak numbers hit earlier in May. California hit its spring peak on May 2, but most of the other large pipeline and barge markets reached their pinnacles on May 17.
Gulf Coast gasoline, which represents the largest source market in the country, hit a peak of $2.6815 gal (ex tax for pipeline parcels) on May 17. Yesterday, this same market closed at $2.2085 gal, a drop of 47.3cts gal or 17.6 percent. If you were a trading company with a 25,000 bbl pipeline batch purchased on May 17, that batch was worth about $500,000 less yesterday than it was at mid-month. Ouch.
Midwestern wholesale values are still high but they too have receded at great speed. Gasoline purchased at Oklahoma and Kansas refineries has dropped by about 43cts gal since May 17 and Chicago gasoline, where refinery downtime is still a huge issue, has dipped by about 30cts gal. If Great Lakes’ refineries regain their stride—and I believe they will—price losses of another 30cts gal could occur by the solstice.
Los Angeles and other West Coast spot markets qualify as the areas that saw the earliest Spring peak, and they’ve sobered up at a steady pace. Los Angeles spot gasoline hit its high Spring tick of $2.8375 gal on May 2, but the same quality fuel was available last night for about $2.38 gal.
If you’re not a student of wholesale, futures, or spot markets, you may be wondering where this is all heading. Well, a rule of thumb is to take wholesale prices in the various markets and add about 60cts gal to those numbers in order to estimate where retail will eventually land. Some 45cts gal of that 60cts gal represents average state, federal, and local taxes and about 15cts gal represents the marketer profit.
Hence, if spot numbers hold between the $2.21-$2.60 gal levels currently witnessed across the country, we could see a number of retail markets dip to perhaps $2.80 gal, while others remain at say $3.00-$3.20 gal. If the teeming masses cut back slightly on consumption, this range could tilt another 25cts gal or so lower. If refiners encounter June troubles at key units, the range could tilt a bit higher.
And then things will change as the Weather Channel and all the various WeatherPlus frequencies turn their attention to the tropics. Hurricane season begins on Friday, but I can’t recall a Category 3 storm making a Gulf Coast landfall in July. We may not see any severe winds from hurricanes until August, but I sense we’ll see some hysterical updrafts in U.S. oil prices by the second half of July.
Footnote: No hankies are necessary for U.S. refiners despite the recent 16-48cts gal price swoon. Even the softest spot market - - the U.S. Gulf Coast - - still finds conventional gasoline selling for nearly $30 bbl above the price of sweet crude. West Coast blends fetches a handsome $35.67 bbl above Alaska North Slope (ANS) crude and Midwestern refineries find gasoline margins some $40.93 bbl to $44.93 bbl over WTI sweet crude. These are numbers that are at least twice what one might have expected heading into the 2007 driving season, and they are several multiples of what were regarded as average returns just four years ago.
Footnote #2: For everyone who credited Nigeria (where warmth and good cheer had a moment this weekend) and Iran (where talks yielded a more conciliatory tone toward the West) for yesterday’s price weakness, I have two words. Stop it! The world is inebriated with a sense that these two constant geopolitical hot spots represent the news that moves the market, when it’s the market that creates the news.