The gasoline price influenced by the thermometer

PRICE PER SEASON

When the temperature in the Northern Hemisphere tends to rise, the differential of the gasoline price regarding to the crude oil also rises, but if the crude oil price has leaned out to USD100/ barrel, the gasoline price has already exceeded that mythical barrier.

The price of fuels in Colombia is more and more linked to the international prices, especially with the ones dealt in the Gulf of the United States, the New York Mercantile Exchange (Nymex) and the International Petroleum Exchange (IP), which are the three major markets that rule the export and import activities of crude oil and fuel in the American countries.

The international price reflects the relationship between supply and demand, including not only the physical barrels traded and consumed daily in the world but also the more numerous and influential “paper barrels” that are dealt in the financial market and reflects the movement of money between markets other than crude oil.

By analyzing only the gasoline, it is observed that the price is closely related to temperature and weather conditions occurring in the Northern Hemisphere. Of course, it has also to do with the Americans mood, determining their potential to travel in the highways.

Each season (summer, winter, autumn and spring), has some specific features of supply and demand which rule much of the operational and commercial planning of the United States refining system.

Spring (January to April)

It is the time after winter in which refineries perform the deepest maintenance getting ready for the high summer demand. In the United States, the refineries loading level drops from 15 million barrels per day in the winter, to 14.5 mbd in March -the lowest level for the whole year.

At spring, gasoline demand grows because the temperature increases causing American families to leave their homes for driving their large cars. Throughout 2006, the gasoline demand went up from 8.6 mbd in January to 9.7 mbd in July, and in 2007, from 9.1 to 9.8 mbd, in the same period. This is the greatest decline period in gasoline inventories. In 2006, the total gasoline inventories fall down 12%, from 225 million barrels in February to 200 in April; and in 2007 dropped 15%, from 227 million barrels to 193 between February and May.

Regarding inventory days, they decreased from 25 to 22 days between February and May 2006, and from 25 to 21 days in 2007 -the lowest in many years. The increase of the differential between the gasoline and the crude oil is produced by the mix of the declined production, growth demand and low inventories.

In 2006 the differential increased from USD2 per barrel in February to USD20 in May, and in 2007 from USD4 to USD40 in the same period, which was a very particular situation ever seen. In the year 2006 the differential was duplicated compared to 2005 due to the damages caused by the hurricanes of 2005 to the refineries, and the MTBE prohibition.

During the spring, futures gasoline contracts have a greater value than the current price due to the upward pressure exerted by the increase in demand as the summer approaches. This phenomenon is known as contango.

Summer (April to August)

Starting this season, the production levels near to maximum capacity are carried out by the refineries, approximately 9.3 million barrels per day of gasoline, and imports are increased from 0.9 to 1.1 mbd. Even with a peak demand of about 9.7- 9.8 mbd, there is an inventories increase of 4%, resulting in a slight decrease in the differential between gasoline and crude oil from the peak observed at the end of spring.

The high demand in the summer is produced by people looking for the high temperatures which are synonyms of relax, vacation and joy. Throughout 2006 the gasoline inventory rose from 22 to 22.5 days between April and August, and in 2007 from 20.8 in April to 21.5 in August. The result of this slight increase in the inventories was a relatively strong differential from June to August, at levels between 15 and 20 dollars per barrel, and between 25 and 40 dollars, in 2007.

In summer, the gasoline price remains in backwardation, that means that futures transactions have lower values than the current one. It happens because the price usually drops in the autumn markedly.

Autumn (September-November)

It is a season characterized by a low gasoline demand and refineries maintenance which causes a limited production. This is the season of the traditional hurricanes in the Caribbean and the Gulf of the United States, which generate several effects, especially the production decrease of the refineries as a way of preventing damages from hurricanes or because they are not able to start their units quickly after a preventive stop.

As a consequence, there is a reduction in the inventories reaching the lowest value of the whole year, so the price differential has no increase because the gasoline demand decreases markedly with the low temperature, as well as the mood of the Americans who have already travelled during the summer.

The lowest differentials of the year are held during the autumn despite of the inventories fall. Gasoline is likely to be as close to the WTI crude as 1 or 2 dollars per barrel. However, if there are substantial damages as a result of hurricanes, this differential could reach the highest levels of the year, like it happened in 2005, when it reached USD40 per barrel in September and October.

Winter (November-January)

During the winter, gasoline inventories are accumulated by refineries because their production has increased due to the post-maintenance performed in the autumn, and because the gasoline demand during this period is the smallest of the year, since the interest of the Americans to travel in the highways diminishes at low temperatures.

Over the past 5 years, the gasoline inventory has increased from an average of 200 to 217 million barrels, and from 22 to 25 equivalent days, that is 13% pointing out the most notorious ascent in the whole the year.

In the winter of 2006 gasoline inventories rose 12% from 200 to 225 million barrels between December and February, being equivalent to grow from 21.5 to 25 days.

Gasoline vs. other fuels

All of the previous considerations have not taken into account the relationship between gasoline and other refined products such as diesel and jet. Diesel and jet have a different season behavior from gasoline and they affect each other depending on the demand pressures in a given time.

The crude oil diets are constantly changed by the refineries in order to optimize their economies and take advantage of fuels with a higher value at any given moment. However, in the United States, gasoline sets the standard since it is the most demanded fuel, unlike Europe where diesel is the main fuel.

In conclusion, the thermometer is a good indicator of the relative strength of the gasoline price over the price of its raw material, the crude oil. When the temperature in the Northern Hemisphere tends to rise, the differential in the gasoline price also rises. The opposite effect also applies.