Pump prices could hit $3.50 a gallon by spring

By Barbara Powell
Bloomberg News

U.S. gasoline at the pump may rise 13 percent by May as crude oil in New York tops $100 a barrel and a recovering economy boosts fuel demand, according to analysts surveyed by Bloomberg News.

The highest price for regular gasoline this year will be $3.50 a gallon, based on the median estimate of 14 analysts. The motor fuel hasn’t reached that level since Oct. 6, 2008, according to AAA, the nation’s largest motoring organization.

“Gasoline prices could spike to $3.40 to $3.50,” said Amrita Sen, a commodity analyst at Barclays Capital in London. “We’re impressed at how well demand has held up at these prices. If crude goes up, it would be difficult to see gasoline not go up.”

New York oil may top $100 a barrel this year, Barclays and other analysts say, as global demand growth accelerates. U.S. fuel use over the past four weeks was 1.6 percent higher than a year earlier, according to the Energy Department. U.S. gross domestic product may grow 3.1 percent in 2011, according to the median of 71 economists in a Bloomberg News survey. China, the world’s largest energy consumer, may expand 9.5 percent.

March-delivery crude futures settled at $90.77 a barrel yesterday on the New York Mercantile Exchange, while March- delivery gasoline closed at $2.5194 a gallon. Brent oil on ICE Futures Europe rose above $100 on Jan. 31 for the first time since September 2008.

Worldwide oil demand may grow in 2011 by as much as 1.8 million barrels a day, or 2 percent, Saudi Arabian Oil Minister Ali al-Naimi said in a speech in Riyadh Jan. 24.

Record High

Pump prices reached a record high of $4.114 a gallon on July 15, 2008, four days after the front-month crude oil contract touched an intraday record $147.27 a barrel.

Regular gasoline, averaged nationwide, was $3.108 a gallon yesterday, AAA said on its website. Prices reached $3.117 Jan. 20. The last time crude in New York was over $100 a barrel, the price at the pump was $3.633 a gallon.

“If you follow the pattern of a seasonal rally in the spring, then we could reach $3.50,” said Tom Knight, vice president of trading and supply at Truman Arnold Cos. in Texarkana, Texas. “The question now is whether $4 is a more realistic target.”

The Energy Department projects retail gasoline will average $3.17 a gallon this year, with as much as a 10 percent chance of reaching $4 in August and September.

“The key uncertainty would be the rate of world economic growth,” said Tancred Lidderdale, senior economist at EIA. “The key issue, given expectations in growth in world consumption and relatively low-growth in non-OPEC supply, is the response of OPEC.”

Excess Capacity

Gasoline’s 2011 price gain may be constrained by excess refining capacity in the U.S., a fact that’s been obscured as unplanned pipeline and refinery shutdowns in the fourth quarter of 2010 caused tightness, said Francisco Blanch, head of commodity research at Bank of America Merrill Lynch in New York.

“I don’t think we hit record prices in 2011, we have too much spare capacity for that to happen,” Blanch said.

U.S. refineries operated at 81.8 percent of capacity in the week ended Jan. 21, according to the Energy Department, a 10- month low.

Valero Energy Corp., the largest independent U.S. refiner, said Jan. 26 that its 14 North American refineries will operate at 83 percent to 89 percent of capacity this quarter as some units undergo seasonal maintenance.

‘Adequate’ Inventories

Pump prices may retreat at the $3.50 to $3.70 level because continued high unemployment and underemployment would reduce demand, said Harry Tchilinguirian, London-based head of commodity markets strategy at BNP Paribas SA.

“The U.S. consumer is not in a position to absorb a rise like in 2008 because unemployment is much higher,” he said. Tchilinguirian said spare production capacity in OPEC countries and the U.S. and imports from Europe, and potentially Asia, will keep a rein on crude and gasoline prices.

The U.S. unemployment rate fell to 9.4 percent in December from 9.8 percent a month earlier and 5.8 percent in July 2008, the Labor Department reported Jan. 7. Applications for jobless benefits increased by 51,000 to 454,000 in the week ended Jan. 22, according to Labor Department figures.

The Federal Reserve left its benchmark interest rate unchanged at 0.25 percent Jan, 26, citing high unemployment and low inflation. Officials downplayed increases in food and fuel costs, saying that “although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.”

‘Competitive Pressures’

While prices of food, metals and petroleum-related products have risen, companies are having difficulty passing along those costs to customers “because of competitive pressures,” the Federal Reserve said in its Jan. 12 Beige Book regional business survey.

The inflation gauge watched by the Fed, which excludes food and energy costs, showed a 0.8 percent increase in the 12 months through November. Central bank officials prefer that the inflation rate range from 1.6 percent to 2 percent.

“The gasoline price can be squeezed higher because it’s still not a dramatic percentage of income,” Paul Sankey, an oil analyst with Deutsche Bank in New York, said in an interview. “People are also more price tolerant after the previous price spike so the barometer is higher until drivers start yelling.”