What goes up, must come down -- but unfortunately for consumers, gasoline prices certainly take their sweet time.
Crude futures closed under $55 a barrel Thursday on the New York Mercantile Exchange, down 10% from the end of 2006 and down more than 16% from a year earlier. Meanwhile, retail prices for regular unleaded gasoline stood at $2.145 a gallon Thursday, just 8% less than a year ago, according to data from the Oil Price Information Service. See AAA's Daily Fuel Gauge Report.
The recent decline in crude-oil futures has fueled hopes that average gasoline prices at pumps around the nation will soon fall under $2 for the first time since March 2005. On March 9, 2005, the average gasoline price stood at $1.99, according to OPIS. Crude futures were trading at $54.77 at the time. Crude futures are close to that price again, yet the sub-$2 fuel level is nowhere in sight.
In fact, the long wait has raised eyebrows among consumers -- as it does every time oil prices drop and gasoline prices at the pump are slow to follow.
"When there is no competitive pressure, why reduce your price?" said Charles Perry, chairman at energy-consulting firm Perry Management. If all marketers follow that reasoning, "the price stays up until one marketer tries to increase his market share by reducing his price."
Indeed, "the service station that is selling 100,000 gallons per day hasn't seen demand drop, so there is no compelling urgency to immediately pass along any savings that they may be seeing in wholesale costs," said Tom Kloza, chief oil analyst at OPIS.
That follows the basic rules of supply and demand and comes as no real surprise.
But to some extent, gasoline marketers are "seeing a little bit of a winter 'sweet spot' where margins have swelled to perhaps 20-30 cents a gallon or more, said Kloza. That follows a December which saw wholesale-to-retail gasoline margins of less than a nickel in many states.
So, "there is a bit of a feast after a holiday famine," for marketers, he said.
Retail dilemma
There are other factors to consider when it comes to calculating profit for gasoline retailers.
"Retail prices will fetch about 12-15 cents a gallon more at the pump than the cost of putting the fuel into the station, plus taxes etc." Kloza said.
"And from that 12-15 cents a gallon margin, credit-card companies will eat up 2%-3% of the profit and other costs can cut into the number as well," he said.
Convenience retailers also buy gasoline in three different ways.
They can buy gasoline delivered into their stations on what is known as a Dealer Tank Wagon, or DTW, said Kloza. "This is particularly common with metropolitan areas and these prices may change only a few times per month."
In an up market, the increases may not be passed along as quickly, he said, so "you'll see branded gasoline cheaper than unbranded gasoline during the early stages of a price spike."
Dealers can also be supplied by distributors who buy product at the local terminal at prices that change every day -- "and generally change in sympathy with the big bulk spot markets," said Kloza.
"Prices for distributors move with the global markets, but there is a bit of a lag," he admits. A 5-cent per gallon decrease in the spot market may get passed along in "a couple of increments, depending on local competition."
But in general, these prices "reflect the global markets within a day or two or three," he said.
And dealers can also use "indexed pricing" to buy their gasoline. "Some of the large- and medium-size chains buy gasoline at formulas that adjust every evening, based on the spot market's move," Kloza said.
At the moment, chains that buy on this basis are "seeing the immediate benefits of the huge spot drops," he said.
Say when
So it all comes back to: when will gasoline prices reflect the recent decline in crude prices?
Some analysts have said that oil prices will bottom out at the mid-$40-a-barrel level. See related story.
If oil returns to $51 per barrel and stays at that level for a while, then retail gasoline prices "should continue declining from where they are now," said Geoff Sundstrom, a spokesman for motorist group AAA.
He expects retail prices to decline to nearly $2 per gallon "since they have only recently begun to reflect what has occurred further up the supply chain since the start of the year."
Consumers "expect and deserve" to see retail gasoline costs fall at the same rate that they frequently increase, he said.
But there has been a bit of a market denial related to the oil-price drop. "AAA suspects retail prices remained high relative to oil and wholesale-gasoline price declines partly because there was a certain amount of disbelief on the part of gasoline station owners, wholesalers and energy investors that the oil price would remain at $51 per barrel or move even lower," said Sundstrom.
Regardless of the recent volatility in energy prices, Sundstrom said "AAA continues to believe the multi-year trend for motor-fuel costs is higher, not lower, because there is considerably more upside potential for oil supplies to become constrained again in the future as rising demand meets a slower increase in global-energy output."
So "this means consumers should not bank on gasoline prices falling back to $2 per gallon for an extended period," he said.
Prepping to purge
It's also important to point out that gasoline marketers will eventually need to unload their winter supply.
"The gasoline we use in January and February is perishable -- it needs to be purged from the distribution system by spring, and replaced with the much more expensive summer specs [specifications], which are less volatile and don't contribute to ozone problems," said Kloza.
When measured against very robust production and imports, gasoline demand is "quite ugly," he said. Then again, it always is in January and February.
The gasoline price "tends to slide lower through mid-February and [had] been following its seasonal tendencies pretty closely so far this year," said Darin Newsom, an analyst at Omaha, Nebraska-based DTN.
Newsom points out, however, that activity in gasoline futures through the early part of this week "has the look of the beginning of a possible contra-seasonal rally."
Overall, "the inventory accumulation doesn't cast much of a shadow beyond the first quarter," Kloza said. "By April, most petroleum terminals won't accept anything but summer gasoline."
So, really, "this market is bit like a bulimic," said Kloza. "We are in the purge or regurgitation phase, but that will set up the spring for a typical bounce on gasoline," he warned.
The gasoline market will likely see average prices hit a bottom between now and Valentine's Day, since the January to February period is a time when refiners make "plenty of winter blends, and demand is typically 500,000 barrels per day lower than it is in say December or April," Kloza said.
But the market could see a "lower bottom" next September-December, if there aren't any Gulf Coast hurricanes, he said.
"I wouldn't rule out $1.75 a gallon in the fourth quarter 2007, but that's not to say it will happen," he said.
The retail market hasn't seen an average price of $1.75 since April of 2004, according to OPIS data.
Newsom points out, however, that activity in gasoline futures through the early part of this week "has the look of the beginning of a possible contra-seasonal rally."
Overall, "the inventory accumulation doesn't cast much of a shadow beyond the first quarter," Kloza said. "By April, most petroleum terminals won't accept anything but summer gasoline."
So, really, "this market is bit like a bulimic," said Kloza. "We are in the purge or regurgitation phase, but that will set up the spring for a typical bounce on gasoline," he warned.
The gasoline market will likely see average prices hit a bottom between now and Valentine's Day, since the January to February period is a time when refiners make "plenty of winter blends, and demand is typically 500,000 barrels per day lower than it is in say December or April," Kloza said.
But the market could see a "lower bottom" next September-December, if there aren't any Gulf Coast hurricanes, he said.
"I wouldn't rule out $1.75 a gallon in the fourth quarter 2007, but that's not to say it will happen," he said.
The retail market hasn't seen an average price of $1.75 since April of 2004, according to OPIS data.
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