Summer Woes Already?

Gasoline, crude-oil prices rise amid supply worries

Published in CSP Daily News

NEW YORK -- Summer is six months away, but oil traders ended the last full session of 2005 fretting about whether gasoline supplies will stretch to meet peak demand when U.S. motorists hit the road for their getaways.

Concerns that a tight supply-demand balance will get much tighter in 2006 after refiners comply with stricter federal-environmental regulations pushed the entire energy complex higher this past week, according to a report in The Wall Street Journal.

As of last Thursday, New York Mercantile Exchange gasoline [image-nocss] futures for January delivery were 6.6% higher at $1.6524 a gallon compared with a week earlier, while crude-oil futures for February delivery were up 3.2% on the week at $60.32 a barrel. The exchange closed early Friday and was closed Monday in observance of New Year's.

Crude prices were up 39% for the year to date, the strongest year for oil since 2002, when prices surged more than 50% in a recovery from the effects of the Sept. 11, 2001, terrorist attacks.

Gasoline led the rally after government data revealed that U.S. gasoline inventories stand 13% below year-earlier levels and well below their five-year average for this time of year.

A report by New York consultant PIRA Energy Group, echoing concerns expressed by other industry consultants, helped spark buying during quiet trading. It said "relatively high prices" would be required to balance gasoline supply and demand in 2006 as refiners struggle to meet more restrictive low-sulfur gasoline requirements.

PIRA said a voluntary phase out of the use of additive methyl tertiary-butyl ether (MTBE) and the mandatory use of ethanol in gasoline production will cut into both domestic and imported supplies.

Some refiners, such as Valero Energy Corp., San Antonio, are keen to eliminate use of MTBE, which has been used to reduce tailpipe emissions but has been found to contaminate drinking water, after failing to win liability protection from Congress.

Mark Routt, a senior analyst at Energy Security Analysis Inc. in Boston, agreed that pump prices will inevitably rise and possibly surpass 2005's highs above $3 a gallon, but he expects refiners will be able to meet demand.

However, a return to $3 pump prices won't have the same impact on consumption as they did in the aftermath of Hurricane Katrina, analysts said. "We've learned that these psychological price barriers never have the same impact the second time around," said Phil Flynn, an analyst with Alaron Trading Corp. in Chicago.