The $5.00 a gallon gasoline fantasy

Strengthening demand combined with a tightening U.S. supply picture (particularly on the East Coast) to further boost price pressures. Gasoline supply in the East Coast market is highly dependent on imports, and events in the weeks following Labor Day complicated the import picture. In October and November, a planned outage at Irving Oil's St. John refinery in Canada, a major supplier of gasoline to the United States, coupled with port and refinery strikes in France, limited the amount of gasoline available for import. These events, along with routine seasonal maintenance at several key domestic refineries, led to a sharp drop in inventories on the East Coast. In late August, gasoline inventories on the East Coast were in excess of their five-year average by over 11 million barrels; however, by the end of November, that excess inventory had been completely eroded, with inventory levels almost 3 million barrels under the five-year average.

The other factor is the impact on demand. While gasoline demand at the pump jumped 4.6 percent last week because of holiday travel, according to data in a MasterCard Inc. SpendingPulse report, we are likely to see a major drop shortly. With storms hurting travel and consumers conserving because of high price, slowing demand should help cap prices.
The other issue is spare production capacity. Currently, according to estimates, the world now, without any further investment, has a cushion of extra production capacity of close 5.5 to 6 million barrels of oil per day. It is not like we have a tightness of supply. While demand is expected to increase, so too will production. According to the EIA as reported by the Wall Street Journal, U.S. gasoline consumption was below levels seen in 2007 and increased U.S. September gasoline demand and characterized the resilience of U.S. gasoline use as, "a surprise in recent months."

Yet longer term the IEA also adjusted its medium-term forecast for U.S. gasoline consumption through 2015 to reduce the projected decline in gasoline use. One reason is an increase in the number of less-efficient light trucks in the U.S. in the wake of lower gasoline prices. The IEA also said that the demand outlook is quite different from a few years ago, when surging consumption helped push oil prices to close to $150 a barrel.

The agency projected global oil demand growth would likely moderate in 2011 amid "renewed structural decline" in developed economies and the moderation in the Chinese economy. In the U.S. we also have a problem that did not exist in the past and that is a current glut of refining capacity. In 2009 according to estimates, North America and Europe shut 1.05 million bpd of processing capacity last year, and closed close to 1.32 million bpd more this year.

According to numbers by the International Energy Agency estimates we could see as much as 6.0 million barrels a day of new conversion capacity that will be added by 2015, accounting for more than 41 percent of world crude distillation capacity. The IEA also says that Asia has added about 1.6 million barrels a day of capacity last year with 800,000 barrels a day in China and 600,000 barrels in India. They also expect capacity additions in the region could total 800,000 barrels a day each year in 2010 and 2011.

All of these reasons and more make it unlikely that we will see $5 a gallon gasoline in the future.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

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About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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