Tempest rages in gasoline as US prices soar

Just as Washington’s political machinery cranks up to investigate high oil prices, the price of wholesale petrol has gone into free fall.

Down 9.3 per cent in the past two days, this week’s sharp drop in gasoline futures follows a steady rise in pump prices towards and – in some parts of the US – beyond $4 a gallon.

It could bring relief not just for motorists but for Barack Obama, US president, who faces growing political pressure over the relentless rise in petrol.

When petrol – or “gas” – last breached $4 in 2008, it sent America’s drivers into shock and intensified the recession that began in late 2007. This time, and in spite of the heat in Washington, the mood on the forecourt feels different.

Four in five gallons of US petrol are pumped at convenience stores, the roadside emporiums selling everything from milk to magazines. Jeff Lenard, of the National Association of Convenience Stores, says that, while more people are paying by credit card, he has not yet detected the rage of three years ago.

“To a certain extent it’s 2008 all over again, but with differences. There’s more understanding of the causes [of high prices], more understanding of whether there is even a bad guy in this,” he says

US demand for petrol – about 8.9m barrels a day – represents about a 10th of total global oil consumption, making it a big driver of oil prices and political debate.

Gasoline is a global market, with the steel tanks that dot the New York harbour trading hub as likely to contain fuel imported from Rotterdam as refined locally.

Gas station signboards serve as a running price ticker for US voters.

This year’s run-up in prices has raised fears that it could knock the US economic recovery and crimp consumer spending.

Ben Bernanke, Federal Reserve chairman, said last month that higher petrol prices were “a very bad development”, draining purchasing power from households and slowing growth.

And when Eric Holder, the US attorney-general, announced a taskforce to probe potential manipulation last month, he notably mentioned gasoline but not diesel or jet fuel.

Petrol generally follows the price of crude oil from which it is refined. But this year price increases have outpaced crude, reflecting nuances in a specialised market.

Price volatility has increased as gasoline inventories have steadily declined since 2010. The fall in stocks has been especially steep on the US Atlantic coast, which is home to the New York delivery point for the benchmark gasoline futures contract.

“People ask: ‘Why is gasoline so high?’ Look at the inventory numbers. They have dropped almost in a straight line. The price of gasoline, quite predictably, rose sharply,” says John Hyland, chief investment officer at United States Commodity Funds, which manages a $2bn crude oil exchange-traded fund.

Ben Bernanke, Federal Reserve chairman, said last month that higher petrol prices were “a very bad development”, draining purchasing power from households and slowing growth.

Many US refiners, lured by higher fuel profit margins, are producing more petrol this year. The gasoline “crack spread” – the difference between the price of the refined product and the cost of the crude used to produce it – has tripled from the start of the year to $30 a barrel.

Yet, stocks have declined because of refinery problems, including a power outage in Texas City that knocked out 5 per cent of US capacity in late April. Traders now fear that floods rolling down the Mississippi could hit operations at refineries in Louisiana.

Given the intense focus on inventories and the recent slide in stocks in particular, the modest rise reported by the Department of Energy this week came as a surprise and triggered a sharp retreat in prices.

Against a backdrop of concern about the strength of the US recovery, after disappointing economic data, there is now a debate over whether higher prices will dent demand as the all-important summer “driving season” of journeys to the beach and mountains approaches.

Indeed, the International Energy Agency has sounded its own bearish warning for oil. The western countries’ watchdog said in a report on Thursday petrol demand would disappoint the market this year, rising in the summer but staying lower than last year if high prices lasted.

“Admittedly, higher prices have not been accompanied by a severe economic recession, as in 2008, when the summer driving season virtually evaporated. Nevertheless, some reduction in discretionary driving relative to 2010 is likely to occur, particularly given the still fragile nature of the economic recovery,” the agency said.

Demand has already weakened enough for some refiners along the Gulf of Mexico to begin exporting petrol to Latin America, which has a shortage of refining capacity.

Other analysts, though, are not so negative. Francisco Blanch, global head of commodities research at Bank of America Merrill Lynch, says: “I believe that US demand will probably hold up reasonably OK even with higher prices. I don’t think we’re going to get the kind of situation here where demand falls off a cliff because you hit $4 a gallon.”