Do you feel like you are paying too much for gasoline? At least you did not have to fill up for the Daytona 500. The special ethanol-blended fuel that NASCAR drivers put into their tanks at the race on Sunday cost more than twice the national average for regular unleaded. And at about 18 gallons per tank, that comes to about $150 a fill up in a car that gets single-digit miles per gallon!
Even so, you are paying more. The U.S. average retail price of regular gasoline has risen to $3.75 per gallon, up 16 cents from last year at this time. The national average price has seen double-digit increases two out of the last three weeks and is up 45 cents since the beginning of the year.
The race higher in gasoline prices is worth watching closely. In each of the past two years, we have tracked 10 “spring slide” indicators that helped us to predict the stock market pullbacks that took place during the second quarter of each year. Energy prices were one of 10 that accurately predicted a market slide each year. In each of the past two years, energy prices began to climb sharply in February, two months ahead of the peak in the stock market.
Watching the Daytona 500 from the “danger zone,” where cars whip by at high speeds of around 175 to 200mph—but can also burst through the walls in a crash — can be a thrill. But gasoline’s “danger zone” may be just plain scary. At $3.75, retail gasoline prices are nearly back in the “danger zone” marked by the highs of around $3.85 to $4.10 per gallon seen over the past five years, as you can see in Figure 1. This range has marked a “danger zone” for market participants. When gasoline prices reached this range in the past, it preceded the stock market slides experienced in 2008, 2011, and 2012.
While high gasoline prices were certainly not the driving factor in the 2008 U.S. financial crisis-driven plunge in the stock market, the high prices did add to stress on the economy as they did again in the springs of 2011 and 2012, when concerns over a European financial crisis rattled investors. Again in the fall of 2012, high energy prices weighed on investor sentiment and helped to fuel a pullback driven by the election and fiscal cliff concerns.
In short, high energy prices can make the economy and markets more vulnerable to a negative event that drives stocks lower.
Photo: LPL Financial
Factors Driving Gasoline Prices
Three major factors have combined to drive the surge in gasoline prices this year: oil prices, gasoline margins, and refinery outages.
- Crude oil prices are on the rise. The price of waterborne light sweet crude that drives the wholesale price of gasoline sold in most U.S. regions rose about $6 per barrel, or about 15 cents per gallon. This accounts for about one-third of the rise in gasoline. Gasoline’s gains are outstripping crude oil’s run up this year.
- Throughout much of November and December 2012, gasoline refining margins were very low, and in some cases negative with a barrel of gasoline worth less than a barrel of crude. As a result, retail gasoline prices were lower relative to crude oil prices. Since the beginning of 2013, gasoline prices versus crude oil have started to rebound.
- Both planned and unplanned maintenance at several refineries have supported higher refining spreads. Many refineries schedule maintenance early in the year when gasoline demand is seasonally low. A string of refinery outages resulted in substantial off-line capacity. The U.S. Energy Information Administration (EIA) estimates that inputs into U.S. refineries fell 9% from 15.9 million barrels per day in mid-December 2012 to 14.4 million for the week ending February 15, 2013.
A factor that is often misunderstood, but likely did not contribute to higher prices was the surge in exports. The United States has become a net exporter of gasoline. The turnaround in U.S. gasoline net exports is remarkable after about five decades of being a net importer, as you can see in Figure 2. But that has not come as a result of undersupplying the U.S. market.
Photo: LPL Financial
U.S. demand for gasoline has declined, but solid global demand has allowed refineries to export gasoline produced using capacity that would otherwise have been taken offline. Over 80% of U.S. exports of total gasoline are produced and shipped from the Gulf Coast, while U.S. gasoline is generally imported along the East Coast. Given the Jones Act (which effectively limits the ability to ship oil from one U.S. port to another), infrastructure constraints, and costs of transporting gasoline around the U.S., were U.S. gasoline exports to be constrained, global gasoline supply would likely decline and U.S. gasoline consumers, especially in the Northeast, would face higher prices.
Avoiding the Danger Zone
Hopefully, gas prices can avoid the danger zone. There are indications that gasoline prices may soon ease.
- Both gasoline futures and crude oil prices declined last week.
- The EIA notes that 11 million barrels of waterborne gasoline are en route to the United States and Canada.
- U.S. refinery maintenance, which reduces capacity, typically peaks in February, and output should return to normal in the coming weeks.
However, the seasonal increase in demand, which typically begins in the spring, could keep upward pressure on prices. If prices again enter the danger zone, we will be watching this spring slide indicator along with the others closely for signs of an impending stock market slide. We will provide an update of all of our spring slide indicators in an upcoming Weekly Market Commentary.