US gasoline prices reach six-month high as ethanol climbs

By Barbara Powell
Bloomberg News

U.S. consumers are paying the most in six months for gasoline because of declining supplies and rising costs for the ethanol added to the fuel. Prices probably will keep climbing, the largest U.S. motoring group said.

Gasoline, averaging $3.561 a gallon at the pump, already costs the most since September, according to AAA. Prices for ethanol, the fuel additive mandated by the government, are the highest in more than seven years after freezing weather and a shortage of rail cars slowed distribution and reduced inventories.

Supplies of gasoline were the lowest since November in the week ended March 21 as demand reached a 13-week high during a period of seasonal refinery repairs, according to the Energy Information Administration. Prices for ethanol derived from corn and blended with gasoline at a ratio of at least 10 percent, may extend gains as distillers take plants offline for routine spring maintenance before the summer driving season.

“We expect that the peak for gasoline prices will be in April with the most likely outcome about $3.65,” said Michael Green, a spokesman for AAA in Washington. “It could go to $3.75 if refineries have problems coming out of spring maintenance.”

Pump prices: Top 10 states with highest and lowest gasoline prices

Gasoline futures advanced 4.5 percent in the first quarter to $2.911 a gallon on the New York Mercantile Exchange. The contract for May delivery fell 1.2 percent to $2.8356 at 8:21 a.m. Wednesday, the fourth consecutive decline.

Record advance

Ethanol climbed a record 81 percent in the quarter, surpassing the 65 percent gain during the third quarter of 2005 when the biofuel replaced methyl tertiary butyl ether as the primary source of octane for gasoline refiners.

Denatured ethanol for April delivery touched $3.578 a gallon Tuesday on the Chicago Board of Trade, the highest intraday price since July 2006. Ethanol’s premium to May gasoline reached 64.7 cents on April 1. The additive has averaged a 17.39-cent discount to the motor fuel since 2005.

Prices at the pump have been rising even as gasoline futures has retreated 5.9 percent from a year-to-date peak on March 3. Congestion on the nation’s rail lines has delayed shipments from the Midwest, where about 89 percent of ethanol plants are located, to terminals in the Northeast where it’s blended with gasoline before delivery to filling stations. East Coast ethanol stockpiles are down 21 percent from a year ago to the lowest level since 2008.

“Suppliers and blenders are passing off the higher cost of ethanol through to the pump,” said Amrita Sen, chief oil market strategist at Energy Aspects Ltd., a research company in London.

Ethanol premium

In New York, the biofuel cost $1.56 more than the gasoline it got mixed with Tuesday, up from a discount of 34.63 cents on Jan. 2.

Federal outlook: Ethanol use to hit record as corn prices slump

Drivers in the Northeast are already paying as much as 11 cents a gallon extra after ethanol in New York jumped $1.10 in March, according to data from Bloomberg. The average gallon of regular gasoline nationwide has risen 29.2 cents from its year’s low of $3.269 on Feb. 6, according to Heathrow, Florida-based AAA. California drivers are paying $4.007 a gallon.

“The ethanol market has been screaming,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “But I think gasoline and ethanol are close to the peak and we should pull back over the next couple of weeks.”

Falling supply

Ethanol inventories in the week ended March 21 were down 10 percent from a year earlier, data compiled by Bloomberg show.

Replenishing that supply is going to be difficult as companies wrestle with when to perform seasonal maintenance and a lack of availability of rail cars, said Julie Ward, an assistant vice president at R.J. O’Brien & Associates, a brokerage in Des Moines, Iowa.

“Until they can get this logistics situation turned around” ethanol prices are going to remain strong, she said. “It’s just a double whammy.”

Demand for gasoline will average 8.79 million barrels a day in 2014, up from 8.77 million in 2013, the EIA, the statistical arm of the U.S. Energy Department, said in its Short Term Energy Outlook on March 11. Supplies fell as refiners reduced capacity during seasonal repairs and sold off winter-grade fuel to make way for summer gasoline, which is costlier to blend.

Stockpiles probably shrank another 2 million barrels last week, according to the median estimate of nine analysts in a survey by Bloomberg.

Inventory turnover

“It’s the rapid turnover in inventories that has surprised people,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. “Inventories are now at the bottom of the range on the five-year average for this particular time of year.”

Fuel efficiency: California may cut gasoline demand 9 percent by 2020

Gasoline stocks typically begin their seasonal rise after refiners complete maintenance. Production rises to meet summer demand and to winnow down crude inventories, which rose to a 16-week high in the seven days ended March 21.

“Inventories should start building once we head into April,” said Andrew Lebow, a senior vice president at Jefferies Bache LLC in New York. “We’re looking for output to be 150,000 barrels a day higher.”

Pump prices have risen in April three of the past five years by an average of 3 cents a gallon, Green of AAA said. The pace of this year’s increases slowed to 3 cents over the past two weeks from 6 cents the prior two weeks, he said.

Retail gasoline prices in 2013 peaked at $3.786 on Feb. 26. The average U.S. pump price on March 31 at $3.561 was this year’s high and 7.6 cents lower than a year earlier.

“We’re not necessarily going to achieve the same peak this year,” Tchilinguirian said.


Also on FuelFix:

Pain at the pump? Smile. At least you don’t live in Norway.