The start of the unofficial U.S. driving season begins on Memorial day which is a U.S. holiday that generally kicks off the summer season. The date generally falls in late May on a Monday allowing vacationers a 3-day weekend to drive to the beach, or mountains or other destinations. Ahead of the summer driving season, gasoline prices generally rise as refiners begin the maintenance of their distillation units.
Over the past 8-years, gasoline prices have generally increased as reflected by the ETF UGA (United States Gasoline Fund). Price rise on a seasonal basis approximately 75% in April for an average increase of 4%. This year should be no exception as refiners begin to draw down their gasoline.
The Energy Information Administration expects the retail price of regular-grade gasoline will average 2.04 per gallon during the 2016 summer driving season which is down from an average of 2.63 per gallon last summer. This should help buoy demand which is currently up approximately 5.7% year over year. A summer average of 2.04 per gallon would mark the lowest summer average since 2004.
Daily and weekly national average prices of gasoline can differ significantly from monthly and seasonal averages. There are also significant differences across regions, with monthly average prices in some areas exceeding the national average price by 40 cents per gallon or more. Unplanned refinery outages or other disruptions to supply can also increase regional product prices to above forecast levels in the short term. In addition, higher overall gasoline demand in 2015, along with changes in the U.S. vehicle fleet in response to fuel economy standards
Because taxes and retail distribution costs are generally stable, movements in gasoline and diesel prices are primarily the result of changes in both crude oil prices and wholesale margins. Oil prices have recently come off their lows at WTI printed at 26 per gallon in March and has climbed nearly 55% over the course of the last 6-weeks.
The Energy Information Administration expects wholesale gasoline margins will average 47 cents per gallon this summer, about 12 cents per gallon lower than last summer. Wholesale margins are forecast to be lower this summer compared with last summer because of higher gasoline production, and because the severe refinery outages from last summer.
The EIA reported that gasoline production decreased in April, averaging about 9.6 million barrels per day. This accounted for the recent draw that occurred in gasoline by refiners. Over the last four weeks, crude oil imports averaged over 7.8 million barrels per day, 4.1% above the same four-week period last year. This accounted for the build in crude oil.
Gasoline inventories decreased by 4.2 million barrels last week, but are well above the upper limit of the average range. Demand remains robust, as total products demand over the last four-week period averaged 19.7 million barrels per day, up by 3.2% from the same period last year. Over the last four weeks, gasoline demand averaged 9.4 million barrels per day, up by 5.7% from the same period last year.
The summer driving season will be off to a strong start as low prices should spur demand but if CFDs on crude oil prices continue to rise, the demand destruction will occur quickly making the issue of elevated gasoline inventories a reason to push prices lower.