Bait and Switch
Many drivers in the U.S. who chose diesel-fueled vehicles over gasoline-fueled ones may have done so for the expected savings from higher fuel economy and historically lower prices per gallon, especially during the summer driving season. However, diesel is currently selling at about a 70-cent premium to gasoline at the retail pump, and that has consumers scratching their heads.
Gasoline and diesel fuel prices have traditionally followed set seasonal patterns from year to year. In spring and summer, the peak driving season, gasoline sells at a premium to diesel fuel. In the autumn, demand for distillate fuels (heating oil and diesel) picks up ahead of the winter at the same time that gasoline demand begins to soften. Refineries begin to build inventories of high sulfur distillate fuel (heating oil) late in the summer, while diesel fuel consumption increases in the fall due to farm use and trucking of goods ahead of the holidays. Heating oil prices put a floor under diesel prices through the winter, since if diesel were selling at a discount to heating oil, diesel could be used for home heating.
This year, like several others this decade, the traditional seasonal pattern does not appear to be holding. At winterâ€™s end, we normally expect gasoline and diesel fuel prices to be converging, with gasoline prices then rising above diesel for the remainder of the summer. However, diesel fuel prices have continued to rise at a quicker pace than gasoline through the late winter/early spring period, and the diesel fuel premium over gasoline is now in the 70 cent per gallon range. In fact, the Short-Term Energy Outlook is projecting that diesel fuel will continue to sell at a higher price than gasoline through the summer, although the price differential between the two fuels is expected to narrow.
Factors in both gasoline and distillate are contributing to the current and projected pricing pattern. Weakness in the U.S. economy has led to softening gasoline demand. While gasoline prices have increased this winter due to surging crude oil prices, they have not risen as high as they would have if year-on-year gasoline demand growth was unfolding at normal rates.
On the other hand, demand for distillates in Europe, Asia, and the Middle East has continued to grow at a fast pace. In Europe, financial incentives continue to promote the transition from gasoline-powered to diesel-powered cars and light trucks, while a growing economy has lifted transportation sector consumption overall. Additionally, emissions standards for diesel fuel continue to tighten across Europe, adding to supply tightness as European refineries catch up to new specifications.
Furthermore, distillate inventories in the U.S. and Europe remain tight while U.S. gasoline stocks are well above the average range for this time of year. Distillate stockdraws in the U.S. have been partially driven by East Coast heating oil demand. However, overall tightness in U.S. distillate markets is due more to slumping imports than to domestic demand strength. While U.S. trucking has felt the effects of our economic slowdown, strong European demand has had ripple effects across the Atlantic with European supply constrained by refinery maintenance, unplanned outages, tighter emissions standards that restrict import sources, and economic disincentives stemming from low gasoline margins. European refiners appear to have trimmed crude runs because of low gasoline margins and diminished export markets. The transition of the European light duty vehicle fleet to high diesel dependency has reduced the value of gasoline produced by European refineries in their home market. And now, weakness in U.S. gasoline markets has deprived European refiners of an economic outlet to dispose of surplus gasoline output. This contributes to tightness in distillate markets on both sides of the Atlantic.
The gasoline-distillate spread may be self-perpetuating to some extent, as the lack of markets for gasoline helps constrain Atlantic Basin distillate supply, boosting distillate prices on both sides of the Atlantic. Any short-term relief appears most likely to come from the demand side as winter ends in the Northern Hemisphere. The wind down in heating fuel use may expose U.S. distillate markets to the slowing economy and decreasing trucking activity.
U.S. Gasoline Prices Show Small Decline: Pace of Diesel Price Increases Slows
For the first time since February 11, the U.S. average retail price for regular gasoline fell. The drop was small, particularly in view of magnitude of the recent increases; the average slipped to 325.9 cents per gallon, a decline of 2.5 cents. Prices on a regional basis fell throughout the country with the exception of the Rocky Mountain region. The average price on the East Coast dropped to 324.1 cents per gallon. The price fell by 1.2 cents from the previous week and was 66.6 cents above the price last year. The price in the Midwest dropped the most of any region, going down by 6.0 cents to 319.2 cents per gallon, an increase of 67.4 cents from a year ago and 13.4 cents below the all-time high price in the region set May 21, 2007. In the Gulf Coast region, the price slipped by 1.1 cents to 316.6 cents per gallon, 72.4 cents higher than the price a year ago. The only region of the country where the average price increased was the Rocky Mountains, where the price jumped by 2.0 cents to 319.8 cents per gallon, 66.0 cents higher than the price a year ago. The average price on the West Coast remained the highest of any region in the country, and registered the smallest drop of any of the five major regions. The average price dipped by only 0.6 cent to 351.7 cents per gallon, 50.1 cents above the price last year. In California, the average price for regular grade was essentially unchanged, down by only 0.2 cent at 360.2 cents per gallon, 45.0 cents above the price a year ago.
For the sixth week in a row, average retail diesel prices increased, and for the fifth consecutive week, the U.S. average price for retail diesel reached yet another all-time high. However, while prices continued to increase, the pace of the increase slowed considerably with the U.S. average price moving up by 1.5 cents to 398.9 cents per gallon. This represented an increase of 131.3 cents above the price last year. On a regional basis, prices remained at all-time high levels in all regions of the country, exceeding $4.10 per gallon in some areas. On the East Coast, the average price was up by 1 cent to 404.5 cents per gallon, 138.8 cents per gallon higher than last year. In the Midwest, the price increased by 0.6 cent, the smallest increase of any region, to reach 396.4 cents per gallon, an increase of 130.9 cents from a year ago. The price in the Gulf Coast went up 1.4 cents to 392.8 cents per gallon, the lowest price of any region. The average price in the Rocky Mountains increased the most of any region, moving up by 6.1 cents to 395.3 cents per gallon. On the West Coast, the average price increased by 3.8 cents to 405.6 cents per gallon, 125.3 cents above the price a year ago. The average price in California grew by 3.6 cents to 411.9 cents per gallon, 125.0 cents above the price a year ago.
Propane Inventories Sharply Lower
With only one week remaining in the 2007-08 heating season, propane inventories continued sharply lower last week, posting a 1.9 million-barrel stockdraw that put total inventories at an estimated 25.4 million barrels as of March 21, 2008. Most of the weekly stockdraw was concentrated in the Gulf Coast with inventories dropping down by 1.6 million barrels. In the East Coast, inventories also moved lower with a 0.3 million-barrel decline, while Midwest inventories remained relatively flat during this same time. Inventories in the combined Rocky Mountain/West Coast region edged lower by nearly 0.1 million barrels last week. Propylene non-fuel use inventories fell last week by 0.4 million barrels to account for a smaller 8.3 percent share of total propane/propylene inventories compared with the prior week.