A $3.399 gal Future?...Maybe, But, Prices to Take a Major Rollercoaster Ride Throughout the Year!

Spring Spike To Return Again
The likelihood of a late first quarter 2014 rally in prices from winter lows remains quite high. Factors that contribute to a seasonal gasoline rally haven’t changed. February through April tends to see plenty of refinery maintenance ahead of the so-called driving season. Specifications for gasoline change in the second calendar quarter and cheaper components that are plentiful in the winter can’t be used during the warmer weather months. In a sense, refining is a bit like the television show “Cake Boss”: cheaper hydrocarbons (or metaphorical “flour”) can be used to manufacture gasoline in autumn and winter, but gasoline tends to be more gluten-free in spring and summer.

The greatest fundamental in oil markets is money, and big money tends to chase oil and gasoline prices higher as spring approaches.

The Northeast is a bit of a new hot spot. There is less North Atlantic refining than in previous years, and imports of gasoline continue to tail off thanks to poor economics in Europe and elsewhere. Super-storm Sandy gave a preview of the region’s vulnerability, and northeastern states now tend to be in the highest quintile of motor fuel pricing.

The Pacific Northwest, on the other hand, is a beneficiary of the U.S. shale boom. Much of the new North Dakota oil production gets moved to the Puget Sound where it is turned into gasoline and other products. Oregon prices for gasoline dipped below $3 gal late in 2013 and together with Washington, this geography may fare better than other regions.

The Gulf Coast and portions of the U.S. Southeast represent a mixed bag. U.S. Gulf Coast refining capacity has advanced to its highest levels on record, and by far represent the greatest cluster of output in the world. But exports of diesel and gasoline have grown steadily in the last three years, and the coast has generally escaped hurricane shutdowns since 2008. The good news is that without the intrusion of weather, Gulf Coast states from Texas through Virginia should see world class refineries supply some of the cheapest wholesale gasoline in the world. The worry is that an interruption in this world class refining system (whether through hurricane impacts or precautionary shutdowns) could lead to brief, but spectacular price spikes.

Florida and some southeastern coastal areas like Savannah, GA and Charleston, SC warrant special attention. Florida is less than 1,000 miles from many Gulf Coast refineries but shipping rates for moving gasoline from Texas or Louisiana to the Sunshine State are four and five times the rates before the shale oil revolution. Many of the barges and tankers traditionally used to ferry gasoline from refineries to Gulf Coast and southeastern ports are now required to move crude. We would not be surprised to see interior counties in the Carolinas, Georgia, and Virginia feature prices that are 10cts gal lower than coastal areas.

Consumer Demand and Behavior

Optimists looking at the U.S. economy will no doubt claim that cheaper gasoline prices are inspiring some behavioral changes among drivers. Most of the rhetoric tends to be subjective cheerleading and is based more on hope than on statistical observation.

The final numbers for U.S. gasoline consumption won’t be delivered by the Energy Information Administration until February, but 2013 may indeed have seen a small rise in demand, which would be the first annual increase since the peak demand year of 2007. For perspective, gasoline demand averaged 390-million gallons per day in 2007, compared to 365-million gallons in 2012.

Gasoline demand may continue to be extraordinarily lumpy. It was quite common to see consumption vary by nearly 1-million barrels per day (42-million gallons) when one compared winter and summer weeks of 2013. That pattern may persist in 2014.

However, a major increase in consumption is improbable in 2014. Demand faces considerable headwinds. U.S. drivers are aging and the fastest growing demographic group includes those over the age of 55, and represents people who will drive less and less. Tougher CAFÉ standards are also ingrained within vehicle requirements, particularly from 2016 forward.

It is clear that 2014 will continue to see gasoline reign as king of the transportation fuels. But watch for diesel to make some more inroads in mid-decade years. Research confirms as many as 40 new light-duty diesel-fueled vehicles will be introduced between now and the end of 2015. Despite higher street prices, diesel could see its market share of light duty vehicles increase to 3% or 4% in relatively short order.