-- John Kemp is a Reuters columnist. The views expressed are his own --
By John Kemp
LONDON, May 21 (Reuters) - U.S. retail gasoline prices have recently re-established a premium over diesel for the first time since mid-2007. This margin will remain and could even widen over the next few months.
The move is a direct consequence of the recession's uneven impact on U.S. demand for refined petroleum products. The Energy Information Administration (EIA)'s data shows gasoline consumption running just 2.6 percent below last year, while the volume of middle distillates (including diesel and heating oil) delivered to domestic users is down almost 15 percent.
This reflects the very differential impact the recession is having on the economy. Most gasoline is consumed by passenger cars and light trucks. While the number of car journeys driven on U.S. roads has shrunk for the first time since records began in 1983, the actual reduction has been small (4 percent from the peak) and so the impact on gasoline consumption limited.
In contrast, distillate is destined for the commercial trucking fleet and railroads, as well as home heating oil and combustion by power producers, which have been hit hard. Freight movements have fallen sharply in line with reduced manufacturing output and trade flows: the number of railcars and containers hauled by U.S. railroads is down 25 percent compared with last year, implying a similar reduction in diesel fuel consumption.
Power producers' use of distillate and heavy fuel oils has also collapsed in response to the run up in oil prices since 2005, and failed to recover despite the subsequent price reversal, as petroleum products remain locked out of the power stack by plentiful supplies of cheap and cleaner burning natural gas [ID:nLJ676263].
The result has been a big build in distillate stocks even as gasoline inventories remain low. By the end of last week, gasoline stocks stood at just 204 million barrels (bbl), down 5.5 million bbl (2.6 percent) compared with the same point last year (209.4 million bbl). But distillate stocks had reached 148.1 million bbl, up 40.3 million bbl (37 percent) on 2008 (107.8 million bbl), and the highest level since October 2006 and before that October 1999.
The distillate overhang has pushed prices for diesel and heating oil steadily lower in comparison with crude. The gross margin has shrunk to less than $5 per barrel (on an HOc2-CLc2 basis) and this takes no account of refiners' costs for power and gas. In contrast, low and falling stocks of gasoline have pushed gross margins above $12 per barrel (RBc2-CLc2).
The market is sending a conflicting signal to refiners. Margins for gasoline are incentivising refiners to activate idled capacity; the poor differential for diesel fuel acts in the opposite direction.
For the time being, refiners are responding to distillate, cutting throughput to prevent an even larger build up. In most years, U.S. refiners begin increasing run rates from late April and early May onwards to meet increased demand for gasoline during the summer driving season. But there has been no increase in runs this year since the maintenance period ended in March.
Last week, refiners processed just 14.1 million barrels per day (bpd) of crude (82 percent of their theoretical capacity) down almost 1 million bpd (6.5 percent) compared with the same week last year (when refiners processed 15.1 million bpd or 88 percent of capacity).
Throughput cuts have left the market carrying limited gasoline stocks ahead of the peak demand period of the year. If demand proves resilient during the summer months despite rising unemployment, or refineries suffer significant hurricane damage, gasoline prices have been primed to spike.
To resolve the tension between gasoline and distillate inventories, gasoline margins will have to rise even further to encourage refiners to raise throughput and produce needed driving fuel despite deteriorating economics on diesel and heating oil. U.S. motorists may therefore have to get used to a rising gasoline price this summer even if crude stabilises.
For analysis of refining margins on gasoline and diesel see: http://graphics.thomsonreuters.com/ce-insight/MARGINS.pdf. For factors influencing U.S. gasoline and distillate demand: http://graphics.thomsonreuters.com/ce-insight/US-PUBLIC-TRANSPORT.pdf. http://graphics.thomsonreuters.com/ce-insight/RAILFREIGHT.pdf. http://graphics.thomsonreuters.com/ce-insight/EIA-POWER-GENERATION.pdf. For analysis of the EIA's weekly report on inventories, production, imports and exports of crude oil and refined products: http://graphics.thomsonreuters.com/ce-insight/EIA-PRODUCT-SUPPLIED.pdf. http://graphics.thomsonreuters.com/ce-insight/EIA-INVENTORIES.pdf.http://graphics.thomsonreuters.com/ce-insight/EIA-CUSHING.pdf. http://graphics.thomsonreuters.com/ce-insight/EIA-REFOPRATE.pdf. http://graphics.thomsonreuters.com/ce-insight/EIA-REFTHRUPUT.pdf. http://graphics.thomsonreuters.com/ce-insight/EIA-PRODUCTION.pdf. http://graphics.thomsonreuters.com/ce-insight/EIA-IMPORTS.pdf. http://graphics.thomsonreuters.com/ce-insight/EIA-EXPORTS.pdf.
(Edited by David Evans)