Rising Gas Prices Painful for
Drivers, but Not for Slumping
Refiners
By Jennifer Friedlin
TheStreet.com/NYTimes.com Staff Reporter
5/26/00 2:30 PM ET
Maria Nunez, a Bronx resident who travels 45 minutes a day
to and from her Americans, Nunez is preparing for even more
costly visits to the filling station as babysitting job on Long
Island, is feeling the pain at the pump. And, like many
summer driving season kicks off this weekend.
"A few months ago, I was paying $1.31 a gallon and now I'm
paying $1.72 a gallon," said Nunez, 57, as she filled up her
white Mustang with premium unleaded at a gas station in
Manhasset, N.Y. "When's it going to stop?"
According to the Energy Information
Administration, not so soon. Retail
prices are expected to average $1.46 a
gallon nationwide for regular unleaded
gasoline. That would be 25% higher
than last summer's average of $1.17 a gallon. Over the last
three weeks, the average nationwide price of unleaded regular
gasoline has risen 11 cents to a high of $1.53 a gallon,
foreshadowing a particularly good quarter for the oil refiners.
Pressure at the Pump
Average National Self-Service Regular Gasoline Prices
* Time frame begins March 1999 ending May 2000.
Source: Lundberg Survey
On Friday morning, New York Harbor unleaded gasoline
futures were down slightly after hitting a nine-year high on
Thursday. June futures were lately trading down at 0.5 cents,
or 0.4%, at $1.0075. On Thursday gasoline futures closed at
$1.0121, approaching the $1.0176 level reached in September
1990 during the Persian Gulf crisis. And analysts believe there
could be more upside potential before the market turns
around.
While Americans make adjustments, such as filling up their
tanks with regular unleaded gasoline rather than premium
unleaded, oil refiners are looking forward to having their day in
the sun, following a two-year slump.
After a glut of crude oil last year that caused drillers to cut
supply, gasoline inventories are now low. And profit margins,
which have been narrow, are widening as the spread between
crude oil prices and gasoline prices has increased to more
than $10 a barrel from as low as $3 a barrel in the first quarter.
The rising margins come even though crude oil prices have
risen in the same period from a low of $24.22 a barrel in
January to the current level of $29.90 a barrel.
"Looking ahead, we believe gasoline is likely to remain strong
this quarter," said Marianne Kah, chief economist at Conoco.
"Downstream operations have improved."
Fadel Gheit, an energy analyst at Fahnestock, said he is
most optimistic about the prospects for the independent
refiners, which have a tendency to ride to the top of the wave's
crest and then crash along with it. Integrated oil companies
can offset some of the volatility with their discovery and
exploration activities.
Gheit named Ultramar Diamond Shamrock (UDS:NYSE -
news - boards), Valero Energy (VLO:NYSE - news - boards),
Tosco (TOS:NYSE - news - boards) and Sunoco
(SUN:NYSE - news - boards), as companies he particularly
favors. He rates each of them a buy. Fahnestock does not do
underwriting.
After a phenomenal first quarter, Gheit said the independent
refiners still have a lot of steam left to post strong
second-quarter earnings, adding that the stocks have yet to
fully reflect the improvement in the earnings outlook. For
example, Houston-based Ultramar is currently trading at less
than eight times forecasted 2000 earnings despite
stronger-than-expected first-quarter results that prompted
analysts to raise their targets for the second quarter.
Analysts expect Sunoco's second-quarter earnings to hit
$1.15 a share, more than 10 times its results in the
year-earlier period.
For the time being, no one expects gasoline prices, which
have been even more buoyant than those of crude, to falter.
With high prices at the pump and inventories at their lowest
level since 1997, refiners are ramping up production just as
quickly as they can. In order to meet demand, these
companies are likely to increase production to the point where
they are refining to a very high 97% of incoming crude.
That means that explosions and fires, the basic facts of
refining life, could cause gasoline futures to move ever higher.
But some analysts said that some of the price pressure will
be offset as futures buyers start liquidating some of their
positions.
"Price action in this market has gotten somewhat ahead of
what can happen," said Tim Evans, a senior energy analyst at
Pegasus Econometric Group. "With a lot of the potential
tightness built in, there is over the next three to four weeks
the potential for disappointment."
Evans added that oil prices might still have some upside
potential but added that some time in June they would likely
start heading back down to the mid 80-cent range as oil
refiners start making more supply available to the gas
stations.
"I think the way you could characterize it is the situation is
serious, but the prognosis is hopeful," Evans said
thestreet.com
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Geez, Both SUN and UDS mentioned. ;-)
Jack |
