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The Wall Street Journal: What Will Summer Bring at Gas Pump?

Wall Street Journal Graphic

Prices Could Level Off
But Uncertainty Looms;
Supply-Demand Snags
By BETH HEINSOHN
April 9, 2007; Page C3

In what has become as much a springtime phenomenon as vacationing college students partying on warm beaches, U.S. gasoline prices are soaring.

But although the $2.763 a gallon average retail price for regular gasoline is higher than the price a year ago, there is no guarantee it will head to levels above the $3 seen last summer.

“Once summer gasoline is in place, and expecting that higher prices might cause demand to adjust, prices could level off,” said Geoff Sundstrom, spokesman for the AAA. In spring, oil refiners replace winter-grade gasoline with a grade that evaporates less in warmer summer temperatures.
 
Prices “will be high in the summer but unless there’s some kind of disaster we remain optimistic we won’t have an average $3 price across the nation,” Mr. Sundstrom said.

Unfortunately, there’s not much of a cushion in the U.S. gasoline pool to soften unexpected supply or demand shocks, or even just the potential for them.

In March, analysts at the federal Energy Information Administration projected that retail gasoline prices for the April-September period would average $2.60. A new forecast is due tomorrow.

“The price is starting off at a higher point than we anticipated, but I can’t say how that will affect the rest of the summer,” said Tancred Lidderdale, one of the authors of the Short Term Energy Outlook and Summer Fuels Outlook.

The greatest uncertainty of the gasoline-price estimate is in the price of crude oil, Mr. Lidderdale said, noting sharp moves in the past few months due to unseasonably warm and then unusually cold temperatures, along with tense U.S.-Iran relations.

With the release of the 15 United Kingdom sailors and marines detained in Iran, those tensions have eased. May crude-oil futures on the New York Mercantile Exchange ended $1.59 lower on the week, at $64.28 a barrel. The front-month contract ended higher in the two previous weeks.

However, the episode served to remind markets how influential geopolitical events can be on traders’ perception of global supply and demand.

“The U.S. doesn’t buy Iranian oil but it doesn’t help when other major economies lose access to it and bid for oil that we’re buying,” said the automobile association’s Mr. Sundstrom.

Unexpected shocks to gasoline supply at a time of snug inventories have also resulted in large price movements.

The EIA’s latest weekly data, published Wednesday, showed that commercially held inventories of gasoline fell 2.4% to 205.2 million barrels, slipping below the lower half of the average range. Implied demand registered a 2.6% jump to 9.491 million barrels a day, the highest level since October 2006 and the most ever for a week in March.

Meanwhile, there have been almost daily reports of unanticipated operational problems at refineries, reducing refinery utilization even more than has the scheduled seasonal work and the Feb. 16 fire that entirely shut Valero Energy Corp.’s McKee refinery in Sunray, Texas.

Some of the snags have lasted only a few days while others, such as those at plants owned by Lyondell Chemical Co., BP PLC and Motiva Enterprises LLC, a joint venture of Royal Dutch Shell PLC and Saudi Arabia’s national oil company, have involved extended outages of key fuel-producing units.

Write to Beth Heinsohn at [email protected]

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