Why Retail Gas Prices are nearing a Record!

Why retail gasoline prices are nearing a record

 By Myra P. Saefong, MarketWatch


SAN FRANCISCO (MarketWatch) — Gasoline prices have climbed every day for the last 36 days so it’s no wonder why consumers are worried that record levels are destined for the pump in the next few months. But the many reasons behind the climb aren’t quite so easy to decipher — making prices even harder to predict.

The simplest explanation for high gasoline prices goes like this: “you’re paying more for gasoline because oil refiners are paying more for crude,” said Byron King, editor of investment newsletter Outstanding Investments.

Alternatives to gasoline find favor

Biofuel and electric cars are gaining traction in the face of a spike in crude oil prices. Steve Gelsi from MarketWatch reports.

Recent political and military tension with Iran has added a “war risk” premium to the markets, he said. “War is bad for business, but rumors of war are good for the oil business.”

“It doesn’t matter that the U.S. imports exactly zero Iranian oil,” King said. “The U.S. competes for oil with every other oil-importing nation and the tensions with Iran have set a higher price at the margin. The margin sets the price for everything else.”

The average U.S. retail price for a gallon of regular gasoline stood at $3.741 a gallon Friday, up 29 cents from a month ago and 31 cents higher from a year ago, AAA data show. Prices have shot well over $4 in some parts of the country, such as California.

Average national prices have been climbing from Jan. 26, when unleaded was at $3.38 and midgrade was at $3.51, after starting the year at the highest–ever level for the beginning of a new year, according to the Oil Price Information Service, which compiles the AAA data, in cooperation with Wright ExpressRead about how gasoline started the year.

The record average was $4.11 a gallon reached in July 2008.

“Rumors drive prices upward, especially when it comes with fear of even a temporary closure of the Strait of Hormuz,” said King.

Flows through the strait, located between Oman and Iran, represented about 35% of all seaborne-traded oil in 2011. Read about Iran’s impact on oil.

“Everyone fumbles for a single reason to explain high crude-oil prices, which are the primary reason for high U.S. gas prices,” said Tom Kloza, chief oil analyst at OPIS.

Brent oil futures, which traded around $124 a barrel on Friday, have climbed around 20% year to date. West Texas Intermediate crude CLJ2 -1.99% , which trades near $106 on Nymex, is about 8% higher year to date. Read about Friday’s action in oil.

Gasoline for future delivery has rallied more than 20% year to date, with the April contract RBJ2 -2.07%  trading at $3.28 a gallon Thursday on Nymex.

And while the higher crude costs have come on the heels of tensions with Iran, there are many other reasons why consumers are paying the highest gasoline prices at the pump since June.

“Iran, money flow, refinery closures, refinery maintenance, exports, imports, poor non-OPEC production growth, and flat OPEC output are all legitimate factors,” said Kloza.

Retail gasoline prices have been tracking the increase in Brent crude prices, said John Felmy, chief economist at the American Petroleum Institute.

It’s about the “cost of making a product,” he said, and on the East Coast, most of the refiners’ cost in making it comes from Brent.

Strong world oil demand, with China growing at a rapid pace and India right behind it, along with supply that is “challenged,” with Libyan production still offline and problems in Nigeria, have all contributed to oil’s strength — and creates a “cloudy crystal ball” for gasoline prices, he said.

Refinery woes

Recent closures in the refining sector have certainly been bad news for consumers.

Sunoco Inc. SUN +0.09%  plans to shut a 335,000-barrels-per-day Philadelphia refinery this summer if no buyer is found.

And in the last few months in Pennsylvania, Sunoco shut a 178,000-barrels-per-day refinery and ConocoPhillips COP +0.16%  closed a 185,000-barrels-per-day refinery. More recently, Hovensa SA shut its 350,000-barrels-per-day joint venture refinery in the U.S. Virgin Islands. Read more on refinery closures.

“A lot of refineries that are refining Brent are losing money,” said Felmy.

Still, the U.S. refinery system produced a record amount of 9.1 million barrels per day of gasoline last year, outpacing 2011 demand of 8.5 million barrels a day, he said, adding that refiners were able to increase their exports of gasoline to keep in business.

In fact, the U.S. exported more gasoline, diesel and other fuels than it imported in 2011 — for the first time since 1949, government data show.

And this year has already been different from most in terms of winter weather and fuel demand.

“During winter months, refiners of gasoline and other oil products usually shift production in favor of heating oil HOJ2 -1.99%  and like products in order to meet that usually higher demand versus summer, while driving usually declines when the weather is bad,” said Jeffery Born, a professor of finance at the College of Business Administration at Northeastern University in Boston.

Overall, it has not been cold and “I suspect that folks have not cut back their driving as much as they normally do when there is snow. Normal production patterns aren’t serving us well during this unusually warm winter.”

The good news for consumers is that because of the warm winter in the U.S., refiners got an early start on planned maintenance, which means some of the spike that is usually seen in March and April “may be happening now,” said Phil Flynn, energy analyst at PFG Best.

“So if oil breaks, we could see a counter-seasonal move in gas to the downside,” he said.

Making sense

For now, as average nationwide gasoline prices at the pump look set to surpass $4 a gallon, consumers may wonder why slowing U.S. fuel demand hasn’t really helped to offset the factors driving prices higher.

Weekly U.S. gasoline demand has fallen to an average of 8.4 million barrels per day as of the week ended Feb. 24, compared with 9.2 million barrels a day a year earlier, according to government data.

“Demand for gas in this country is off quite a bit, but our gas demand only accounts for about 1/10 of world demand,” said Jeff Lenard, a spokesman at the National Association of Convenience Stores, a trade group for an industry that sells 80% of the nation’s gasoline.

“So while our demand is decreasing, the other 90% of demand is not,” he said. “What is happening on the global market really affects what you see at the corner store.”

Consumers also wonder why retail gasoline prices appear to spike at the same time as crude-oil prices.

Most energy companies value their inventories using a “last-in, first-out method,” said Northeastern University’s Born, which “basically means that they use the most recent materials cost to compute cost of goods sold.”

When crude-oil prices are rising, the material costs for gasoline refineries right alongside, he said, and if companies don’t raise their prices for gasoline as fast as the rise in the cost of their crude oil supplies, “they will experience a decline in profits and profit margins.”

At the retail level, consumers don’t really see the effect of that initial rise in oil prices, because retailers are holding back prices, said Lenard.

“There is usually a lag of a week or two as retailers cut margins to retain customers, but just like refineries can’t sell fuel at a loss, neither can retailers — and they start passing along more of these increases,” he said. “Then as both rallies continue, it seems like they are operating simultaneously, but gas prices are reacting to previous oil price increases.”

Against this backdrop, the impact of $124 Brent crude prices may not be fully factored into U.S. retail gas prices yet.


There may be some hope of relief for consumers. This year, after all, includes a U.S. presidential election.

“High gas prices are not favorable to the incumbent administration as they can hinder economic growth and aggravate the voting populace based upon the direct impact on their day-to-day lives,” said Kevin Mahn, president and chief investment officer of Hennion & Walsh Asset Management.

“President Obama recently announced his energy policies focusing on increased levels of U.S. production and further promotion of alternative energy research, [but] whether these policies are adopted or successful remains to be seen,” he said.

‘There are no short-term solutions unless all opposing factions in the Middle East and North Africa kiss and make up.’

James Williams, WTRG Economics

The election year could also increase the probability of a release of oil from the Strategic Petroleum Reserve, said James Williams, an energy economist at WTRG Economics. That would provide a “relatively small and temporary relief.”

He doesn’t expect any real solutions from politicians of any party, however, and there are no short-term solutions “unless all opposing factions in the Middle East and North Africa kiss and make up.”

An SPR release would give the East Coast and Gulf Coast refineries some relief from high Brent crude prices and send “an important message” that the U.S. is “capable of protecting its domestic market as Iran threatens to close down the Strait of Hormuz,” said Bob van der Valk, a petroleum-industry analyst based in Terry, Mont.

Also, crude from the Bakken shale of North Dakota and Canadian oil sands, along with additional production in Texas coming on stream “will go a long way in making the U.S. energy secure,” he said.

For now, van der Valk said California gasoline prices may reach an average $4.50 by July 4, while the East Coast reaches $4.

“All heck will break loose when Iran comes out fighting and we have a bad [Atlantic] hurricane season,” van der Valk said.

Myra Saefong is a MarketWatch reporter based in San Francisco.

FaceBook IPO gets better

Image representing Facebook as depicted in Cru...

Image via CrunchBase

FaceBook IPO should float T. Rowe’s boat

Mutual fund holds 5.2% interest in social networking company; also has large stake in LinkedIn

As Facebook Inc. prepares what may become the biggest IPO ever by an Internet company, the Baltimore-based asset manager is betting this time is different. T. Rowe holds the biggest stake of any mutual-fund company in Facebook, the world’s largest social-networking service. It is also among the main holders of Zynga Inc. (ZNGA), Angie’s List Inc. and LinkedIn Corp (LNKD)., all public companies, and has put money into Twitter Inc. and LivingSocial.com, which are closely held.

T. Rowe, which manages $490 billion, mostly in equities, is telling investors that Internet companies are more mature now than during the 1990s, when companies with no earnings prospects went public. The current Web companies have greater potential and are further along in their development, T. Rowe Price said in a report to shareholders last year titled “A New Era of Internet Investing.”

“They didn’t get caught up in the hype of the dot-com world, but they seem to be saying they see value in some of these new companies,”Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island, said in a telephone interview.

T. Rowe Price owns 5.2 percent of Facebook’s Class A shares, making it the only mutual-fund manager with a stake of more than 5 percent, according to the registration statement filed by the Menlo Park, California-based social-networking website yesterday. The firm owns 6 million Class A shares and 12.2 million Class B shares.

‘Substantial Amount’

T. Rowe Price’s own documents show that its mutual funds held Facebook shares valued at $408 million at the end of 2011, Robert Benjamin, a company spokesman, said in an e-mail. The company owns a “a substantial amount” of additional Facebook shares in other accounts for clients, Benjamin said.

Facebook filed to raise $5 billion in what would be the largest Internet IPO on record. The amount is a placeholder used to calculate fees and may change.

Facebook is considering a valuation of $75 billion to $100 billion, two people with knowledge of the matter said last week. At the high end of the range, that would value Facebook at 26.9 times trailing 12-month sales, more than doubleGoogle Inc. (GOOG)’s valuation when the search-engine operator went public in 2004.


Controlling Risk

Heather McDonold, a spokeswoman for T. Rowe, declined to comment on Facebook and the firm’s other Internet investments. The company, she said, is managing risk by keeping the investments small as a percentage of its funds.

“Except in a couple of instances, no single investment currently represents more than 1 percent of any fund,” she wrote.

The company owns 15 percent of LinkedIn (LNKD), making it the largest shareholder, according to data compiled by Bloomberg. It is the third-largest holder of San Francisco-based Zynga, with a 12 percent stake, and among the top four owners of Indianapolis- based Angie’s List with a 12 percent holding. T. Rowe also has a 0.3 percent stake in Chicago-based Groupon Inc (GRPN).

Zynga shares have gained 6 percent since its IPO; Angie’s List is up 9.5 percent; LinkedIn climbed 61 percent; Groupon rose 7.5 percent.

‘No Guarantee’

T. Rowe Price invested in Zynga, Angie’s List and Chicago- based Groupon before their 2011 IPOs, McDonold said, declining to give a price. T. Rowe Price bought LinkedIn after the company went public, McDonold said.

Traditionally, making an investment in a company before its IPO was a good way to make a lot of money, said Tom Taulli, whose Los Angeles-based website, IPOPlaybook.com, analyzes IPOs. More recently, he said, private market valuations have been so high “that getting in early is no guarantee that you will make money,” he said.

Twitter, based in San Francisco, raised $100 million in September 2009 in a venture capital round that included T. Rowe Price. SkyNews reported in July that the firm was set to pay about $90 million for an added Twitter stake, citing people familiar with the situation.

LivingSocial.com, based in Washington, has received a total of $1.03 billion from investors including

T. Rowe Price.

Fidelity Investments, whose funds can invest in a limited amount of illiquid assets, typically acquires non-traded shares directly from the issuer because it can negotiate certain rights with the purchase, said Kristina Salen, global sector leader for media, Internet and telecommunications at the Boston-based firm.

Researching Companies

Salen declined to comment on Fidelity’s Facebook holdings and how the firm acquired them.

Salen said relationships with private firms grow out of connections Fidelity analysts build while researching companies in their industries.

“We spend a lot of time with private companies,” she said in a telephone interview. “It doesn’t necessarily mean we will invest in them.”

T. Rowe Price was viewed as out of step with the times for its refusal to embrace the dot-com boom in the 1990s, Kunal Kapoor, an analyst for Chicago-based Morningstar Inc., wrote in a 2004 note.

“The rest, of course, is history,” Kapoor wrote. “The market tumbled, T. Rowe’s conservatism protected its investors.”

Conservative Investors

The technology-heavy Nasdaq Composite Index lost 66 percent of its value between June 30, 2000 and Dec. 31, 2002, according to data compiled by Bloomberg. T. Rowe Price’s shares fell 33 percent over the same stretch, including reinvested dividends. Denver-based Janus Capital Group Inc. (JNS), which had a reputation for more aggressive investing, dropped 70 percent.

“T. Rowe came out of that bear market in pretty good shape because of their conservative nature,” Russel Kinnel, director of mutual-fund research at Morningstar, said in a telephone interview.

The success of the new generation of tech companies is fulfilling the early promises of the Internet, Robert Sharps, a portfolio manager at T. Rowe Price, said in the firm’s April newsletter.

“What we are seeing now is what fueled much of the optimism and ultimately much of the speculation in the 1990s,” he said.

In its newsletter this January, the firm identified Internet software and service, mobile and cloud-computing companies as areas of focus for its portfolio managers.

T. Rowe Price is the third-largest holder of Mountain View, California-based Google Inc., the fourth-largest holder of Seattle-based Amazon.com Inc. (AMZN) and one of the biggest in Cupertino, California-based Apple Inc. The three technology stocks represented the firm’s largest positions as of Sept. 30, data compiled by Bloomberg show.

T. Rowe Price shares rose 2.9 percent this year. In the 25 years ended Dec. 31, they returned 20 percent a year with dividends, more than double the performance of the Standard & Poor’s 500 Index.

–Bloomberg News–

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