BLBG: Gasoline Peaking as Refinery Output Nears Record, Demand Slows
July 6 (Bloomberg) -- Gasoline, the best-performing commodity investment this year, may be peaking as refiners make fuel at near-record rates and demand slows with rising unemployment and the global recession.
U.S. fuel use probably crested this weekend with July 4, according to AAA, the nation’s largest motoring organization, which estimates demand fell 2.6 percent during the holiday period from a year ago. Valero Energy Corp. and BP Plc are among refiners producing 9.24 million barrels of gasoline a day, just 2.2 percent shy of the record set in August, according to the Energy Department, after restarting units idled earlier in the year.
This year’s record 88 percent surge in first-half gasoline futures came as investors bet on a recovery from what the International Energy Agency in Paris called the worst global oil demand since 1981. Wholesale gasoline will decline 4.6 percent to $1.70 a gallon by the end of the year, futures markets show, and the drop may be as much as 19 percent, according to Adam Sieminski, chief energy economist with Deutsche Bank AG.
“A lot of this rally was driven by the hope we’re going to see a recovery later this year,” said Andrew Lebow, senior vice president for energy at MF Global Inc. in New York. “If we don’t, we’ll be dealing with the reality of higher inventories and sluggish demand.”
Gasoline outpaced crude oil’s 58 percent gain through June. Prices last year reached a peak of $3.631 on July 11, before falling to 78.5 cents on Dec. 24 as the U.S. recession deepened. The high this year was $2.1124 on June 16. Futures for August delivery fell 6.82 cents, or 3.7 percent, on July 2 to settle at $1.7908 a gallon on the New York Mercantile Exchange.
AAA Forecast
U.S. pump prices and demand have peaked and won’t go higher this summer, AAA said July 1. Average pump prices for regular gasoline fell 0.1 cent to $2.629 a gallon, AAA said July 2 on its Web site. That’s down 2.4 percent from the high of $2.693 on June 21.
“The Fourth of July is typically the busiest three-day weekend of the year for motor vehicle travel,” said Geoff Sundstrom, a spokesman for AAA.
Demand has struggled to recover as the U.S. economy remains mired in the deepest recession in half a century. The U.S. unemployment rate rose to 9.5 percent in June from 4.8 percent in February 2008, the Bureau of Labor Statistics said July 2. Economists forecast the jobless rate will peak at 10 percent in the fourth quarter, according to data compiled by Bloomberg.
Demand Falls
Wholesale gasoline demand fell 0.8 percent in the week ended June 26, according to the Energy Department’s Energy Information Administration. The four-week average was 0.9 percent above revised figures from a year earlier.
Gasoline consumption in April, the most recent month available, was down 1.9 percent from a year earlier and the lowest for the month since 2003, according to the EIA.
“The idea that we were going to see an unexpected jump in gasoline demand has flown the coop,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.
The EIA projected on June 9 demand would rise 0.9 percent to 9.091 million barrels a day this summer.
“Earlier in the year gasoline prices went up because refiners cut production because demand was poor,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “Improving margins led to more supply.”
Refinery utilization rates, which fell to 80.4 percent of capacity during the week ended April 10, have risen to 87 percent as plants came back from seasonal maintenance.
Crude Rally
Futures rose 23 percent between May 15 and June 16, surprising analysts who were forecasting prices to peak by Memorial Day, on crude oil’s push beyond $73 a barrel amid speculation the recession was easing.
“We were all wrong because we were wrong on crude, and crude is the major factor for gasoline prices,” said Lebow.
Crude oil futures, which touched $73.38 on June 30, fell 3.7 percent to $66.73 a barrel on July 2.
Even if crude rises, larger fuel inventories will keep down the price of gasoline, said Sander Cohan, an analyst with Energy Security Analysis Inc., an energy consultant in Wakefield, Massachusetts.
U.S. gasoline stockpiles rose 2.3 million barrels to 211.2 million in the week ended June 26, up 4.8 percent in three weeks as refiners increased output, according to the EIA. Supplies are 0.3 percent above the five-year average for the period.
Crude oil inventories last week were 350.2 million barrels, 19 percent above the level in the period ended July 4, 2008, the week before oil prices reached a record $147.27 a barrel.
Storm Threat
Another gasoline rally could come if storms disrupt refinery operations, according to industry analysts.
“If refiners over-restrict supply, we might get caught against a scenario where we have a hurricane in August or September and have a price spike in late summer,” Cohan said.
Inventories fell to a 41-year low in the week ended Sept. 19 after two hurricanes slammed into the Gulf Coast, shutting 20 percent of U.S. refining capacity.
A weaker U.S. dollar and rising equities can support a rise back above the June 16 high. The dollar has fallen 0.2 against the euro this year through July 2. A weak dollar makes commodities more attractive as an alternative investment.
“In this environment, it’s going to be very difficult to re-challenge those highs,” said Tom Knight, trading director at Truman Arnold Cos. in Texarkana, Texas. “The only way we do that is in a significant breakdown in the dollar, which will send all the energy prices higher.”
Dollar Performance
Strategists who most accurately forecast the dollar’s performance against the euro this year see a 17 percent increase in the second half of the year, according to a Bloomberg news survey. The Standard & Poor’s 500 Index has fallen 0.76 percent to 896.42 this year.
With gasoline inventories back to above-average levels, distillate tanks filled and some 60 million barrels being stored on ships, it is unlikely that products will lead prices higher.
“With energy markets starting to look beyond the U.S. driving season, it remains unclear where the next pocket of support for petroleum prices will come from,” analysts at Bank of America’s Merrill Lynch said in a report dated June 30.
