Record-breaker!
Mid-year review of 2007 petroleum markets An interview with Brian L. Milne, Refined Fuels Editor, DTN
Q: Thanks for your time today, Brian. Love to hear a quick recap on the year to date. Can you shed any insight into the tight supply and higher prices in the fuel markets so far this year?
A: You’re right—gasoline supply has been tight. We’re below traditional supply levels as we head into Memorial Day, and have seen strong pricing in the gasoline market as a result. There have been regional product shortfalls in Colorado, Kansas, Arkansas and Iowa. We’re still in the middle of it—which is keeping gas prices at a premium. Retail gasoline prices recently set a nationwide record high.
I’d say we might be nearing a short-term peak in gas prices, but I have to couch that. If we continue to see refinery problems and supply fails to build, prices can go much higher. There are still speculators buying, and, at this point, we have a nervous market.
Demand is very strong, too. April demand growth was a bit slower in response to higher prices, but here we are now with high prices and demand is still very strong. The price shock is over; now people are used to seeing $3.00/gallon gas. We think retail prices will hover around $3.00/gallon through the summer. Of course, with problems prices can spike higher quickly. Regional supply issues can also cause more pain at the pump for some parts of the country.
On the futures side of the market, RBOB is trading near record highs. When prices get this elevated, you’ll see a surge in supply, and recent data does show gasoline supply is building. The week of May 7th, we saw the 5th highest gasoline import rate in the history of the industry.
Meanwhile, the markets remain very sensitive to geopolitical events.
Q: Why were gasoline supplies so low in the beginning of the year?
A: In the 12 weeks from February to April, we experienced the biggest drawdown in history. There was a 15% drop in supply. There were a series of unexpected refinery unit outages. It was fast and furious there for a while—1 or 2 a day. In many cases, they were short little blips, but there is a cumulative effect that does add up. In today’s world with stricter fuel specifications, refineries are more dependent on keeping all units in working order.
There were also very low amounts of imports coming in through the early part of the year. European refineries were running into maintenance issues, too.
Q: Which way is the wind blowing on alternative fuels?
A: Let me talk about a few trends to watch in the days ahead.
First, after spiking last year, this year ethanol is trading at a discount to gasoline. A lot more ethanol production has come online in 2007 and at this point, supply levels have overtaken demand.
Second, we are not seeing a lot of discretionary blending outside the Midwest yet, even with the economic incentives. If you are a gasoline blender, you get a $0.51/gallon credit designed to drive the use of more ethanol. Right now, there is simply a lack of infrastructure to blend ethanol and biodiesel at the terminal level across the country.
Terminal operators in the Southeast, Northeast and Texas who want the revenue from blending ethanol and biodiesel will need to build the infrastructure. Too often, splash blending biodiesel produces a mix that is outside of spec. It will take a couple of years before you see the infrastructure in place, but there is definitely a trend underway to increase the blending capacity at the terminal. You’ll see terminal automation systems like DTN Guardian3™ helping operators manage this.
Next, California is considering a new gasoline blend. Ethanol is already required, but we may have an even greater percentage mandated in June.
Nationally, there is a focus to expand the current Renewable Fuels Standard, with legislation that does that now being considered in Washington.
Last, we see ethanol pressuring the already tight driver situation. We’ve got more fuel movements by truck, but the pool of qualified drivers has been shrinking. After the gasoline hauler crashed off the highway in San Francisco coming from the Benicia refinery in April—Senator Boxer has been quick on the draw to introduce tougher legislation on drivers. With an already limited number of drivers; we’re seeing a tight situation here.
WANT TO LEARN MORE?
Brian Milne will be attending the upcoming ILTA Conference and Trade Show in Houston, TX June 11 – 13. Visit www.ilta.org for more information.
Brian will be presenting at the DTN User Summit, held in Omaha, NE August 12-15. Reserve your spot today at www.dtn.com/promo/summit
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