The recent surge in U.S. gasoline prices may be stalling thanks to a growing supply of crude oil and a retreat by speculators in the futures market. After weeks of consecutive increases, the average price of a gallon of gas in the U.S. fell more than a penny this week, from $3.94 on April 2, to $3.93 on April 9. In California, the state with the highest gas prices in the lower 48, prices fell to an average of $4.28 a gallon on April 9, down from $4.35 three weeks ago.
“I think we’re seeing the gas and diesel markets start to run out of steam,” says Ben Brockwell, director of data and pricing at Oil Price Information Service (OPIS), a New Jersey-based energy research firm. Two weeks ago, Brockwell was all but certain the price of gas would hit a national average of $4 a gallon by the end of April. Now he’s not so sure: “There’s a chance this market has peaked and that we won’t see $4 average prices at the pump.”
Gas prices haven’t fallen everywhere, though. They continue to rise along much of the East Coast, particularly in New England, where the average price rose 7¢ last week, from $3.89 to $3.96. A flurry of East Coast refinery shutdowns of late has squeezed supply chains and could continue to add to the price of gasoline this summer, particularly in the Northeast.
The price of gas is determined primarily by the price of oil, which has fallen recently due to questions surrounding the strength of the U.S. recovery, as well as news that Iran will resume talks on its nuclear program. Rising OPEC production and a growing supply of crude in the U.S. have also helped dampen oil prices recently. The U.S. is now producing more than 6 million barrels a day, the most in 12 years. But with demand at its lowest level since the mid-1990s—and overloaded pipeline infrastructure unable to move it to refineries quickly—supplies are building faster than they have in decades.
A Bloomberg survey of energy analysts indicates that U.S. crude supplies climbed to 364.4 million barrels last week, their highest level for early April since 1990. Supplies in Cushing, Okla., where the price of West Texas Intermediate is set, have risen particularly fast—nearly 40 percent this year. The amount of crude stored in Cushing rose to more than 40 million barrels at the end of March, nearing the April 2011 record of 41.8 million barrels, and nearly double the amount stored there just three years ago.
This glut of supplies could be impacting the behavior of oil speculators, who have been pouring billions of dollars into a variety of oil-related futures contracts since October, betting on an Iranian supply disruption and, as a result, helping lift oil prices 30 percent in the last six months. The amount of speculative money in the oil market hit a record high in mid-March, when money managers held a net long exposure to oil through 642,724 futures contracts. At 1,000 barrels per contract, that’s roughly the equivalent of 643 million barrels of oil—more than the entire world uses in a week. But speculators pulled back last week, reducing their net long positions to 576,526 futures contracts. That’s still the seventh-highest weekly total ever, according to Citigroup (C) oil analyst Tim Evans.
“The question is whether that simply reflects end-of-the-quarter profit-taking, or whether it signals a more significant change in market sentiment,” Evans says. “There isn’t enough data to say for sure that the buying spree has run its course. We can’t ever assume they won’t build an even larger position in the future.”