EIA raises summer US gasoline price forecast

Cites crude price run-up, increased demand

EIA said it expects summer motor gasoline demand to average 9.3-mil b/d, up 1.8% from last summer, despite higher prices....due to more drivers and vehicles, increasing miles traveled, and larger vehicles with higher horsepower.

High oil prices should propel US retail regular-grade gasoline prices in May to a monthly average price of about $2.35/gal, although weekly prices and some regional prices will likely be higher, the US Energy Information Administration said Apr 7.

Summer gasoline prices April through September are projected to average $2.28/gal nationwide, 18 cts/gal more than the agency anticipated in a March forecast, and 38.3 cts/gal higher than last summer's average of $1.902/gal. On Apr 4, the average weekly regular-grade pump price was $2.22/gal, according to EIA, the statistical arm of the US Energy Department.

The overall forecast price increase was largely due to stronger oil prices, EIA explained. The agency projected West Texas Intermediate spot prices this summer would average $1.348/gal, 37 cts/gal above record-high levels last summer. In per-barrel terms, EIA raised by $7.29/bbl from last month its forecast for the summer WTI average spot price, to $56.63/bbl. The second-quarter price projection was lifted to $56.85/bbl and the third quarter price projection was raised to $56.40/bbl.

There is a "reasonable expectation" national average retail gasoline prices will be above $2.35/gal on any given day or week during the summer period, "given the volatility in this market," EIA chief Guy Caruso said at a press conference to release the forecast. But he said the agency had not forecasted weekly or daily highs. He also noted prices will be well below all-time, inflation-adjusted highs of $3.12/gal reached in March 1981.

US West Coast summer gasoline prices will likely remain "substantially higher" than the national average, as they have been historically, EIA said. "In the last five years, maximum weekly price deviations among regions have averaged 26 cts/gal, but have been as high as 50 cts/gal," EIA noted in the report. Variations include transportation costs, as well as differences in environmental mandates and state sales and excise taxes, a gap which has been as high as 22 cts/gal, EIA noted.

Meanwhile, EIA said it expected oil prices to remain over $50/bbl for the rest of 2005 and 2006. "Oil prices are likely to be sensitive to any incremental oil market tightness," the agency said in its Short-Term Energy Outlook for April. "Imbalances, real or perceived, in light product markets could cause light crude oil prices to increase to levels above the $55/bbl average projected."

Strong crude prices were attributed to robust worldwide demand, which has remained hearty despite high prices; expectations OPEC supply growth may not be able to accommodate increased demand; a lack of spare crude production capacity; strong freight rates; and geopolitical risks, such as the continued insurgency in Iraq and political unrest in Nigeria and Venezuela.

"High world oil demand, sparked by a robust economic growth, is continuing to keep crude oil prices high and to increase competition for gasoline imports," EIA said. "In the US, additional changes in gasoline specifications and tight refinery capacity can be expected to increase operating costs slightly and limit supply flexibility, adding further pressure on pump prices."

EIA said it expects summer motor gasoline demand to average 9.3-mil b/d, up 1.8% from last summer, despite higher prices. The agency cited more drivers and vehicles, increasing miles traveled per vehicle, and larger vehicles with higher horsepower.

US gasoline output is also projected to grow this summer to 8.382-mil b/d, a 0.5% increase from last summer, EIA said. But supply is not expected to keep up with demand due to limited refining capacity growth, EIA said. As a result, refinery utilization rates are forecast to hit new record highs of 94.7%-96.1% during the summer months. And the continuing implementation of new sulfur mandates is expected to add to operating costs for US refiners, according to the report.

Increases in motor gasoline imports and larger primary gasoline inventories are expected to reduce the impact of refining capacity limitations, easing tightness in supply-demand balances and thereby mitigating price fluctuations, EIA said.

Gasoline inventories are starting the summer driving season at 212-mil bbl, 11-mil bbl above last year's level and 10-mil bbl above the five-year average, the agency noted. End-of-the-season inventories are projected to be 202-mil bbl, 5-mil bbl below last year but little different from the five-year average, EIA said. In contrast to last summer, when inventories rose, primary stocks are projected by EIA to decline "in a manner consistent with normal seasonal patterns. As a result, inventories are expected to play a more prominent role in meeting projected demand, thereby helping to mitigate price fluctuations."

Net gasoline imports are projected to average 890,000 b/d this summer, up almost 5% from last summer's average, and a new high. "Nonetheless, incremental foreign supplies may be harder to obtain than in previous summers and are expected to be costly," EIA said. Caruso noted that Europe and Asia are working at much higher rates of refinery utilization than in recent years, and called imports from those regions "critical" to the US gasoline market.

Europe will continue to be the biggest supplier of total motor gasoline imports into the US, EIA said. Europe also accounts for the bulk of incremental supplies, especially blending components, the agency said.

EIA noted high transportation costs in recent periods "have raised the bar" on the size of the trans-Atlantic price differentials required to induce spot cargoes to flow toward the US East Coast. "However, current price signals clearly favor marginal gasoline shipments" to the US, the agency said.

US on-highway diesel prices should average $2.24/gal this summer, up 21 cts from its summer forecast in March, EIA said. The agency explained that diesel prices have risen over the last few months in response to strong crude prices, high utilization rates and a "relatively low level of distillate inventories" caused by strong end-winter heating oil demand. But with the heating season over, there should be less distillate demand pressure on diesel prices, EIA said.

Please visit: www.platts.com

Their coverage of energy matters is extensive!!.