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US retail gasoline prices follow crude prices lower

Hydrocarbon Engineering,

According to the US Energy Information Administration (EIA), the US average retail price for regular gasoline was US$ 3.45/gal. on Monday, the lowest price on the Monday before Labor Day since 2010. The average price at the pump is now 25 cents/gal. lower than it was the end of June.

A lower North Sea Brent crude oil price is the main driver of the decline in the gasoline price. The current price of Brent is lower than it was both in June 2014 and heading into the Labor Day weekend last year.

The recent decline in gasoline prices largely reflects movements in crude oil prices, according to the EIA. In June of this year, Brent spot prices reached their year-to-date maximum level of US$ 115/bbl, well above the average of US$ 102/bbl through the first 22 days of the current month and US$ 100/bbl on 22 August. Current Brent prices are below their August average level over the past 3 years, which ranged between US$ 110 – US$ 113/bbl. In 2010, crude oil prices were much lower because the global economy was just beginning to recover from the 2008 – 2009 recession.

The recent reduction in the Brent spot price likely reflects the market’s perception of reduced risk for Iraqi oil exports and news reports of increasing Libyan oil exports. Additionally, some economic indicators released over the summer suggest that global demand growth may be weaker than expected. Finally, the end of the third quarter and fourth quarter mark the Autumn turnaround season for refineries, and reduced crude buying ahead of cuts in refinery runs is likely putting some downward pressure on prices.

In addition to changes in the price of crude oil, changes in retail gasoline prices are also affected by changes in wholesale gasoline crack spreads. Crack spreads reflect gasoline market conditions, such as the supply/demand balance. Gasoline crack spreads east of the Rockies have been stable over the summer, remaining near June levels, and as a result have had little impact on changes in retail prices. In New York Harbor, the US Gulf Coast and Chicago crack spreads dipped in late July as US refineries, particularly in the Midwest and Gulf Coast, ran at record levels.

The fluid catalytic cracking (FCC) unit is important for the production of gasoline and recent malfunctions have reduced gasoline supply and contributed to lower total US gasoline inventories. Inventories have declined 5.9 million bbls in the past three weeks. However, declining crude oil prices have more than offset the modest increase in crack spreads.

The EIA highlights that retail gasoline prices in the US vary significantly. Prices are lowest on the Gulf Coast at an average of US$ 3.24/gal., while prices are highest on the West Coast at an average of US$ 3.83/gal. It is common for the Gulf Coast and West Coast to have the lowest and highest regional prices, respectively. Gulf Coast prices are often low compared with high prices in other locations because the Gulf Coast is home to half of the US refining capacity, produces more gasoline than it consumes, and does not rely on supply transferred from other US regions or imported from the global market. West Coast prices are often higher than those in other areas of the country because of the more restrictive gasoline specifications in California, the region’s dominant market. California specification gasoline is difficult and more costly to produce. As of 25 August, Rocky Mountain prices averaged US$ 3.65/gal . and East Coast and Midwest prices both averaged US$ 3.40/gal.

EIA predicts that US average retail price of gasoline willed cline modestly through to the end of the year, reaching a monthly average low of US$ 3.30/gal. Gasoline prices often fall following Labor Day as seasonal demand wanes and the market shifts to winter fuel specifications. In recent years, gasoline crack speads have been very weak in the fourth quarter after refineries emerge from autumn maintenance and begin supplying gasoline to a market with relatively low demand. This weakness has generally translated into lower retail prices.

Adapted from a press release by Emma McAleavey.

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