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Today in Energy

April 13, 2011

The outlook for transportation fuel markets this summer

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

On April 12, the U.S. Energy Information Administration (EIA) released the April 2011 Short-Term Energy and Summer Fuels Outlook (Outlook) that includes a detailed look at the forecast for transportation fuels during the upcoming summer (April through September).

Regular-grade gasoline retail prices, which averaged $2.76 per gallon last summer, are projected to average $3.86 per gallon during the 2011 driving season. The monthly average gasoline price is expected to peak at about $3.91 per gallon by mid-summer. Diesel fuel prices, which averaged $2.98 per gallon last summer, are projected to average $4.09 per gallon this summer. Weekly and daily national average prices can differ significantly from monthly and seasonal averages, and there are also significant differences across regions, with monthly average prices in some areas exceeding the national average price by 25 cents per gallon or more.

Because taxes and retail distribution costs are generally stable, movements in gasoline and diesel prices are driven primarily by changes in crude oil prices and wholesale margins. The retail price projections in the Outlook reflect higher prices for the refiner acquisition cost (RAC) of crude oil, which averages about $112 per barrel ($2.67 per gallon) this summer compared with the $75 per barrel ($1.78 per gallon) average of last summer. EIA expects wholesale gasoline margins (the difference between the wholesale price of gasoline and the refiner acquisition cost of crude oil) will average 53 cents per gallon this summer, up 18 cents per gallon from last summer and slightly higher than the previous 5-year average of 50 cents per gallon. Similarly, forecast wholesale diesel margins are higher this summer (60 cents per gallon) than last summer (40 cents per gallon).

The price forecast for transportation fuels is highly uncertain, in large part due to the uncertainty in the outlook for crude oil prices. Both recent experience and the sizable participation in near-term futures options contracts (with a wide range of strike prices) clearly demonstrate that prices can move within a wide range in a relatively short period. For example, the lower and upper limits for the 95% confidence interval for the June 2011 WTI futures contract over the five trading days ending April 7, 2011 were $90 and $132 per barrel, respectively. (See the Outlook's discussion of Energy Price Volatility and Forecast Uncertainty.)

Realized crude oil prices that differ from our forecast would likely be reflected in the price of motor fuels, with each dollar-per-barrel sustained difference in crude oil prices relative to the forecasted prices translating into approximately a 2.4-cent-per-gallon difference in retail prices, absent consideration of factors specific to the markets for gasoline and diesel fuel. For the five trading days ending on April 7, 2011, market prices of futures and options contracts for gasoline suggest a 33% probability that the national monthly average retail price for regular gasoline could exceed $4.00 per gallon during summer 2011.

EIA projects gasoline consumption will average about 9.3 million barrels per day (bbl/d) over the summer, an increase of 45,000 bbl/d (0.5%) over last summer. Population growth and a recovering economy contribute to gasoline consumption growth, while higher gasoline prices and the increase in the Corporate Average Fuel Economy (CAFE) tend to moderate it. EIA expects distillate fuel consumption, which is more strongly affected by the continuing economic growth (particularly in industrial output and foreign trade), will average 3.8 million bbl/d, an increase of 87,000 bbl/d (2.3%) from last summer's average. Fuel ethanol blending into gasoline increased from an average of 735,000 bbl/d during the summer of 2009, to an average of 868,000 bbl/d during summer 2010 and EIA forecasts an average of 912,000 bbl/d this summer, which is about 9.8% of total gasoline consumption.

At the onset of the summer driving season, total motor gasoline stocks, at an estimated 215.7 million barrels, are 8 million barrels below the level of a year-ago, but 1 million barrels above the most recent 5-year average (2006-2010). Net imports of motor gasoline are projected to average 630,000 bbl/d, a decrease of 70,000 bbl/d from last summer. EIA projects the average total gasoline stock draw over the summer will be about 48,000 bbl/d compared with last summer's 26,000 bbl/d average stock draw and the previous 5-year average draw of 39,000 bbl/d.

Distillate inventories started the summer season at 154 million barrels, 7 million barrels higher than this time last year and 26 million barrels higher than the previous 5-year average. Distillate stocks normally build during the summer season in preparation for winter heating demand. This summer's projected 7-million-barrel stock build is lower than the average 22-million-barrel build over the five previous summers and the 21-million-barrel build last summer.

In summary, our forecast calls for modest growth in motor gasoline and distillate fuel consumption, reflecting both continued economic growth and the restraining effects of higher crude oil and product prices compared with last summer.