by Beth Heinsohn

01-05-07

High US gasoline prices, it seems, haven't been high enough. Springtime inventories are at their lowest in six years, and US refineries are struggling to raise fuel output to meet strong demand. These factors have helped push retail gasoline prices to $ 3 a gallon in many parts of the country, but that hasn't been enough to attract the imports that could, as in the past, head off further price spikes.
"If there's no spare inventory in the Atlantic Basin, and you can't get (barrels) to move in April, how do you get them to move in May, June and July?" said one fuel consultant whose work for major transportation fuel companies keeps him from speaking on the record. "It's scary."

European countries, collectively the largest supplier to the US, appear to have had neither extra inventory nor production at a time when the US needs it most -- the traditional start to the US summer driving season is just weeks away.
Typically more than 10% of US supply, total imports of finished gasoline and blending components are a significant part of the gasoline pool, rising to as much as 15% during supply crunches.

Lingering doubts over imports
Gasoline imports in the most recent US weekly data rallied to a respectable 12.7% of supply, up from April's 11.3%, March's 10.4% and February's 9.4%, but there are doubts about whether the level is sustainable without a further rise in US prices or a moderation in consumption. As of mid-April, gasoline in storage in the Amsterdam-Rotterdam-Antwerp area was just over 7 mm barrels, after holding in the middle of its average range in February and March, according to the Paris-based International Energy Agency.
The figure seems small relative to gasoline demand in Europe and very small relative to the US gasoline market and inventories, the fuel consultant said.

Refinery operation and labour issues have constrained gasoline supply in Europe. Output and exports fell while plants underwent seasonal maintenance. At the same time, astrike by port workers in Marseilles slowed -- and then briefly shut -- production at several refineries. European refined-product traders haven't seen much gasoline headed to the US because of a May 9 strike that is being threatened by Belgian refinery workers. Better to keep gasoline at home in case of a local price spike, they reason.
"Europe is very tight and much of the material which would be going to the US is staying in the barge market," a physical market trader said.

Product tanker rates for transatlantic voyages have fallen 12% since the end of the French strike, reinforcing the notion of flagging gasoline exports.
"It remains to be seen whether, with European refineries gradually returning from their March maintenance peak, the usual volumes of gasoline can be sent to the structurally short, and currently tight, US market," IEA analysts wrote in the April monthly report.

US gasoline consumer no longer king
At the same time, higher gasoline demand from other countries has been competing with strong US demand, a factor the US Department of Energy's statistical arm sees contributing to a larger draw on US inventories this summer.
Imports aren't seen rising because higher gasoline demand in Iran, Nigeria and Venezuela "is putting pressure on imports that otherwise would have come to the US," said James Kendall, director of the EIA's natural gas division.

Alternatively, imports may increase but not bring much price relief to US motorists. US imports have been lacklustre because Europe as well as the US doesn't have an inventory cushion, says Mark Routt, an analyst with Energy Security Analysis in Wakefield, Massachusetts. If that weren't the case, reportedly high US demand alone would have boosted imports by now.
"Is it a demand pull or a supply push?" Routt asks rhetorically. European gasoline stocks haven't risen sufficiently to move prices there lower and provide the incentive to move barrels to the US Absent a significant drop in European pump prices, imports likelywill stay at bay and US gasoline prices could climb higher still.

Making matters worse is the US's move to ethanol from a mostly banned petroleum-based gasoline additive. Summer-grade gasoline with ethanol, now in its second year of widespread use, has to be blended from a smaller pool of blendstocks to meet both environmental standards and the mandate for ethanol use.
"This constraint in the gasoline market is not the volumetric balance of base components, but the balance of additives," Routt says.

The old additive, methyl tertiary butyl ether, or MTBE, was a blendstock whose use was compatible with clean-air fuel formulation and could be used to increase summer-grade gasoline volumes, said the fuel consultant.
"MTBE was the grease in the system; it lent flexibility," he said. "Now the flexibility is price."



Source: www.downstreamtoday.com / Dow Jones & Company