By John W. Schoen Senior Producer
msnbc.com
updated 4/8/2004 3:14:27 PM ET 2004-04-08T19:14:27

The U.S. Energy Department expects gasoline prices to peak in June at about $1.80 for a gallon of regular unleaded and then gradually decline through the summer -- with possible price spikes along the way, according to the department's latest monthly forecast. That's slightly lower than last month's forecast, which called for peak prices of $1.83 cents a gallon.

The April outlook predicts that gasoline prices will average $1.76 a gallon for the full year -- 20 cents higher than last year, and two cents higher than the average projected in the department's March report.

Summer gasoline demand is expected to hit a record 9.32 million barrels per day, up 2.2 percent from last year. U.S. gasoline production is projected to reach a summer record of 8.46 million barrels per day, up 2.4 percent from last year. The shortfall will be made up by imports of some 864,000 barrels per day, up 2 percent from last summer, according to the latest monthly forecast.

The report said retail gasoline prices have hit record levels due to 1) higher and volatile crude oil prices; 2) worries about tight gasoline supplies this summer, and 3) higher transportation and blending costs to meet tougher new regulations designed to cut pollution.

Among the factors cited for the recent run-up in crude oil prices are 1) high growth in world demand, especially in the U.S., China and other East Asian counties; 2) higher freight rates; 3) the decision by the Organization of Petroleum Exporting Countries to cut oil output; and 4)uncertainty about production in Iraq and political unrest in Venezuela.

As the Energy Department updates its gasoline price forecast for the summer, private energy experts are tweaking their own spreadsheets -- looking at a variety of forces that will push and pull the price you pay at the pump this summer.

And, while forecasters have their own favorite sets of data, there are few key numbers that you can keep an eye on if you want to make your own prediction about where gasoline prices are headed.

With demand for gasoline rising and supplies tight, pump prices have hit record highs, pinching consumers wallets, and putting pressure on Washington for relief.

Beyond the “official” forecast, private businesses – from Wall Street research firms to trucking companies – have developed their own methods of predicting where gas prices are headed. And while some spend a fortune developing complex computer models to crunch piles of data, no one has yet come up with a reliable crystal ball.

Forecasting gasoline prices, it turns out, is a bit like forecasting the weather. You can rely on the weatherman. Or you can step outside, check the temperature, see which way the wind is blowing, and make your own forecast. While demand rises fairly gradually, short-term supply swings can send prices spiking.

Here are some of the things to look for:

Crude oil prices
Crude prices are a major factor at the pump– because the cost of crude oil represents a little less than half the cost of each gallon of gas.

Refiners also tend to hold back buying more crude when prices are high: they’re worried that if prices fall, they’ll be stuck with too much high-cost crude. So if they buy less crude, they make less gasoline, which tightens gas supplies.

This has not been a good year for consumers of crude oil. Prices surged this spring as demand increased, supplies remained tight, OPEC threatened to cut production further, and traders bid up prices further on terrorism fears. Crude prices are easing back a bit, but this number is a major predictor of future gasoline prices.

Gasoline inventories
This number – reported once a week -- represents how much “extra” gasoline supply is sloshing around the system – sitting in storage tanks, pipeline, tankers and local gas stations. If these supplies are lower than normal, dealers and wholesalers can charge more.

Inventories typically rise in the late winter and early spring as refiners switch over to making less heating oil and begin storing up gasoline for the summer driving season. This year, those inventories are a bit lower than normal – about 200 million barrels – which has helped keep gasoline prices high.

If gasoline inventories “build,” that’s a sign that refiners are making more than drivers are consuming, which usually means gasoline prices will soon fall. On the other hand, if there’s a big “draw” on inventories, it means retailers are selling gasoline faster than refiners are making it. And that often sends prices higher.

This year, with inventories a bit lower than normal, refiners have some catching up to do if prices are to follow the typical pattern of peaking around Memorial Day.

“We probably need to see at least a 15-million-barrel build by the third of June,” said energy futures analyst William O’Neill at A.G. Edwards.

Refining capacity
This number measures of how much of their total refining is being used, week by week. Right now, the average level is about 88 percent of capacity, which means there’s still a little excess in the system to deal with short-term interruptions like a fire, or pipeline breaking, or routine shutdown for maintenance.

But as this number rises closer to 100 percent, that margin for error goes away. Once refiners are running flat out, if one of them has to shut down for an emergency, supplies get tight and prices can spike.

Last summer, refining capacity hit rates of a little over 94 percent, according to Energy Dept. data.

Crack spreads
This one gets a little technical but the idea is simple: it’s roughly the profit margin a refiner can expect to get for on each gallon of gas produced. The higher the crack spread, the more likely refiners will want to produce more gasoline.

“Higher spreads mean a signal is being sent to refiners: ‘You make this we’ll pay you,’’” said O’Neill.

To check this number, you have to do a little math. Take the current gasoline futures price per gallon (for the nearest month) and multiple by 42 to get the price of a barrel of gasoline. Then compare that to a barrel of crude oil and see how much you’d make to produce that gasoline.

In this case, As of April 2, gasoline futures on the NYMEX traded at about $1.07 a gallon (these are wholesale prices.) Multiply by 42 and you get $44.94 for a barrel of gasoline. Oil traded at $34.39, which gives you a crack spread of $44.94 - $34.39 = $10.55, which is historically fairly high.

If refiners increase production enough to boost gasoline inventories, prices usually head lower. On the other hand, if the crack spread is too narrow, refiners are likely to wait for those spreads to widen before they make decide to make a lot more gasoline. And that could keep pump prices high.

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