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13 mayo 2007

Soaring Gas Prices Already Near Highs, And It's Not The Top

Every spring, Americans enjoy baseball, hot dogs -- and soaring gasoline prices.

The average price of all grades of gasoline leapt above $3 a gallon last week, the Energy Department said, already near the record highs of the past two summers. Regular unleaded soared to $2.971. California regular is now more than $3.42.

With driving season fast approaching, energy experts are warning that gas prices have yet to find their peak. When they do, they will stubbornly hold that painful level throughout the summer. Supply will remain tight just as millions hit the road.

That assumes no big hurricanes or other major supply disruptions.

We seem to go through this exercise twice a year. In the months before peak winter heating-oil demand, stockpiles are always "too low," and only high prices will "get us through the winter." Sure enough, prices rise, consumers are careful about home and business heating, and imports surge.

Then the same happens ahead of Memorial Day, the traditional kickoff to the driving season.

This time, though, we may actually be in a bit of a jam.

Running On Empty

U.S. gasoline stockpiles, at 193.1 million barrels, have never been this low at this time of year. Stocks have plunged from an excess of the five-year average to 13 million barrels below it. They've fallen 34.1 million barrels in the past 12 weeks, according to DOE data.

There's no sign yet that prices have climbed high enough to cut usage. There is just a tad under 21 days of supply in U.S. inventory, said Eric Wittenauer, an energy futures analyst at A.G. Edwards. There should be at least 23.

That's odd. Refineries should have been building motor fuel supplies in that time period. But the industry hit a streak of very bad luck. A series of outages shut several key sites across the country.

"This is the worst spate of refinery problems I've ever seen," said John P. Kilduff, an energy analyst at Man Financial and veteran of the business. "Fires, operational issues, environmental issues, lightning strikes."

An Exxon Mobil (NYSE:XOM) refinery in Torrance, Calif., suffered a power outage in March after a possum got into a Southern California Edison substation, causing a "flash-over" and voltage fluctuation.

Gasoline Outpaces Crude

No wonder gasoline prices have been outpacing crude. Gasoline futures did fall 1.21 cents on Wednesday to $2.2326 a gallon as crude supplies continued to rise.

But since Jan. 21, gasoline has shot up 59% while crude has risen just 22%.

Or look at the crack spread, the refiner's profit margin from "cracking" a barrel of crude into gasoline. The crack is now above $30 a barrel. Kilduff is stunned. "It used to be under $10," he said.

That's been great news for refiners' bottom line. Valero (NYSE:VLO), Exxon and others posted strong profits on refining margins despite overall revenue declines.

Normally, many refineries shut for planned maintenance in late winter or early spring. These are huge mechanical operations with many heavily stressed moving parts. As with a New York City cab, you put off maintenance and minor repairs at your own risk.

But that's just what the industry did. With refining output in chronic shortage, these huge plants were under the gun to meet the never-ending fuel demand from U.S. consumers. That's how accidents happen.

"Since (hurricanes) Katrina and Rita, a lot of refiners had put off maintenance work, which always requires a shutdown," said Tom Bentz, senior energy analyst for BNP Paribas Commodity Futures in New York.

Any facility that wasn't ravaged by those killer storms was under huge pressure to keep up a dangerous pace. "Some of them still had to do maintenance after Katrina, but they were much briefer, less comprehensive than usual," Bentz said.

All these problems have pushed refineries' capacity use rate to just over 88%. "Normally, it would be at 93% to 95%," Kilduff said.

So if U.S. refiners can't do the job, why don't we do what we always do -- import? When the U.S. consumer reaches out for excess supply in a distant land, we always get it.

Not this time.

"Europe's economy is booming," Bentz said. "Normally they would send their excess to the U.S., about 10% of their output." But that new local demand will mean no excess for export.

What's more, Europe has had its own problems. A strike at the French port of Marseilles prevented European product from shipping out. The snarl backed up the pipeline until European refineries had to cut their output.

It seems like the fates have conspired to deliver an energy crunch. Even if Europe or Asia did have some fuel to spare, new environmental regs are working against smooth distribution. It's harder than ever to import refined product.

"(Refineries) are strained all the time, even more so now with mandates for ultra-low sulfur diesel and lower-sulfur-content gasoline," Kilduff said.

This makes importing tricky even in the best of times. "You have to be careful about mixing blends that don't meet these new standards. So there's less flexibility to cope with what should be minor upsets," Kilduff said.

Said Bentz: "You have to have just the right stuff at the right place at the right time."

So demand here and abroad is at record levels. The U.S. refinery picture is chaotic, and imports won't fill the gap. Is the situation hopeless?

Not quite.

"I do think they (U.S. refineries) will come around, and gasoline production will pick up ahead of the driving season," A.G. Edwards' Wittenauer said. "As far as relief at the pump, we're still gonna have tight supplies despite (higher) production."

Kilduff agreed on this crucial point. "We should see them clearing themselves," he said. "If we get capacity utilization back over 90%, then maybe we're in the process of getting past the worst of it."

Wittenauer is more upbeat about the import picture. He thinks the industry will figure out the new hurdles and find some fuel.

It already has started to happen, he said. "Imports were at 850,000 barrels a day in mid-March. Now they're over 1 million."