November 10, 2014 By Brian Milne, Energy Editor, Schneider Electric
For the first time since late 2010, the U.S. retail gasoline price average for regular grade slipped below $3 gallon, with the Energy Information Administration reporting a $2.99 gallon average on Nov. 3 in its weekly survey.
The average has more downside, with lower wholesale costs still working through the supply chain.
The national average seemed stuck above that psychological barrier, mostly straddling $3.50 gallon in what was viewed as the new normal. Even as U.S. crude production surged to a 28-year high, gasoline prices seemed stubbornly high, with wholesale gasoline values set by the international market and not domestic crude prices. Wholesale gasoline values are linked to Brent crude prices, with Brent reflecting the value of North Sea crudes.
For its part, Brent crude seemed stuck above the century mark amid geopolitical tensions, some of which led to supply disruptions as in the case of Libya. As those tensions eased, albeit they are resurfacing now, and the euro zone economy remained weak, limiting demand, Brent values tumbled below $100 bbl, trading in the mid to low $80s since mid-October.
Working in the background was building U.S. crude supply that was gradually wiggling free from the countryside despite restrictions on exporting those hydrocarbon molecules amid numerous infrastructure developments and by railing crude oil. Pipelines were constructed or repurposed, activity that continues, debottlenecking the supply chain to allow crude to reach the massive refining sector along the U.S. Gulf Coast, while crude was also railed to refineries along the East Coast and, at a slower pace, to the West Coast.
These improvements pushed out U.S. crude imports that are now well below the five-year average rate of 8.7 million bpd at 7.4 million bpd, and continuing to trend lower. Following the letter of the law, condensates—a very light oil that fetches a lower price than heavier grades, have also been exported this summer, bypassing the restriction on US crude exports because the hydrocarbon stream ran through a field stabilizer or other limited processing unit. Alaska North Slope crude has also been exported to South Korea, with the US crude restrictions on exports not valid in the 49th state.
Like a lumbering locomotive, the wave of new U.S. crude supply was loudly moving down the tracks, but its benefits still seemed to be in the distance. That changed when Saudi Arabia announced discounted selling prices for its crude this autumn instead of cutting production, an action the market interpreted as the kingdom’s efforts to maintain market share instead of supporting a higher price. Moreover, some analysts and traders have suggested the discounted prices are aimed at US producers, hoping to slow their output.
Coinciding with the sub $3 gallon average was a pop in implied gasoline demand, which surged 295,000 bpd to 9.162 million bpd during the final week of October—the highest weekly demand rate since the end of August. Gasoline marketers should hold their excitement since one week’s data doesn’t make a trend. However, lower gasoline prices have historically been linked to increased demand.