This Week in Petroleum: Price Parity

Gasoline Prices, Diesel Prices Both Decrease

April 25, 2007 -- The National Football League draft scheduled for this coming weekend is designed to promote parity by giving the least victorious teams from the past season the highest draft picks, which they can either use to bring in top talent from the college ranks or trade away to bolster their squads with proven professional players. Parity has also become an issue for gas and diesel fuel consumers.

For many years, retail gasoline prices rose seasonally to levels well above diesel throughout the spring and summer months. However, as illustrated in the figure below, retail diesel prices since 2005 have challenged this pattern, moving to higher levels than gasoline for many weeks during the peak summer driving season. The situation observed in recent years reflects an underlying change in relative supply/demand balances so pronounced that summer gas prices move above diesel only when extraordinary market forces add pressure to gasoline beyond that attributable to seasonality.

This year, however, retail gasoline prices have shown extraordinary strength since late January, rising much more rapidly than diesel to stand currently in, or slightly above, virtual parity. Will, then, the 2007 summer driving season see sustained gasoline price premiums over diesel? Factors that could support such a scenario include: delays in both scheduled and unscheduled refinery maintenance programs; tight gasoline supplies in Europe, limiting Europe's ability to export significant volumes of surplus gasoline to U.S. markets; strong gasoline demand; and geopolitical tensions in Iran, Nigeria, and Venezuela that, along with OPEC production cuts, may contribute to tightening global gasoline markets. As a result of such forces to date, U.S. gas consumption has relied more heavily on product withdrawals this year to meet surging demand.

The most recent EIA Short-Term Energy Outlook (STEO), released on April 10, forecast summer 2007 (April-September) retail regular gasoline prices at an average of $2.81 per gallon. During this same period, retail diesel prices are expected to average $2.82 per gallon, implying virtual price parity. Thus, our most likely scenario foresees a relationship between diesel and gasoline prices that falls into the middle ground between that observed over the last two years and experience earlier in the decade.

Gasoline Prices, Diesel Prices Both Decrease

Gasoline saw a slight decrease for the week of April 23, 2007, falling 0.7 cent to 286.9 cents per gallon. Gas prices are 4.5 cents per gallon lower than at this time last year. East Coast gasoline prices were down 0.4 cent to 283.5 cents per gallon. The Midwest saw gas prices fall 3.2 cents to 277.5 cents per gallon. Gasoline prices for the Gulf Coast dropped 0.8 cent to 275.5 cents per gallon. Rocky Mountain gas prices increased 4.3 cents to 284.4 cents per gallon, while West Coast gasoline prices were up 2.3 cents to 321.8 cents per gallon. The average gas price for regular grade in California was up 1.1 cents to 331.6 cents per gallon, 24.8 cents per gallon above last year's price.

Retail diesel prices also fell this week, decreasing 2.6 cents to 285.1 cents per gallon. Diesel prices are 2.5 cents per gallon lower than at this time last year. All regions reported price decreases. East Coast diesel prices fell 2.5 cents to 283.7 cents per gallon. In the Midwest, diesel prices were down 3.3 cents to 283.1 cents per gallon, while the Gulf Coast saw a decrease of 3.4 cents to 281.5 cents per gallon. Rocky Mountain diesel prices were down 0.3 cent to 297.8 cents per gallon. Diesel prices on the West Coast saw a decrease of 0.3 cent to 295.3 cents per gallon. California diesel prices fell 1.1 cents to 300.4 cents per gallon, 9.9 cents per gallon lower than at this time last year.

Propane Inventories Slightly Lower

Propane inventories continue to show only modest activity for this time of year, as propane stockholders begin to gear up for more robust re-stocking in the weeks ahead. Last week, total propane inventories moved slightly lower by 0.1 million barrels and settled at an estimated 25.9 million barrels as of April 20, 2007. Regionally, only the Gulf Coast reported strong activity with a weekly stockdraw measuring 0.5 million barrels. At the same time, East Coast and Midwest inventories moved up by 0.1 million barrels and 0.2 million barrels, respectively, while the combined Rocky Mountain/West Coast region remained relatively unchanged. Propane non-fuel use inventories slipped lower by 0.1 million barrels last week to account for a smaller 8.6 percent share of total propane/propylene inventories, compared with the prior week's 8.9 percent share.


Source: US Dept. of Energy