[Donger]

Since last fall, the average U.S. retail price for regular gasoline has been close to or above $3 per gallon in large part due to high crude oil prices. High crude oil prices are expected to remain an important reason why retail gasoline prices are projected to stay above $3 per gallon for some time to come. As the chart below indicates, we are now in the “time of the season” when gasoline demand begins to increase. As seasonal demand increases, prices tend to rise as well, all else equal. Even though U.S. gasoline demand has been lower than year-ago levels so far this year, EIA still expects that rising gasoline demand over the next few months will drive retail prices higher. So, while gasoline prices have risen above $3 per gallon mostly due to high crude oil prices, increasing gasoline demand will likely take retail gasoline prices to $3.50 per gallon and above, even if year-over-year gasoline demand is negative. The simple fact that more and more gasoline will be used over the next few months will probably be enough to cause retail gasoline prices to increase, even if crude oil prices begin declining, as EIA is currently projecting. Additionally, the cost of making “summer-grade” gasoline (“summer-grade” gasoline produces less smog) is significantly more than making “winter-grade” gasoline, helping to raise retail prices even further during the summer months, all else equal.

Of course, should crude oil prices not decline from current levels of over $110 per barrel for West Texas Intermediate (WTI) crude oil, retail gasoline prices could end up peaking even higher than EIA is currently projecting. In our latest Short-Term Energy Outlook, we project the U.S. average retail price for regular gasoline to average around $3.60 per gallon in May and June, implying prices even higher than that during some parts of those months. This projection is based on average monthly WTI spot prices of about $103-$104 per barrel and retail margins (the difference between retail prices and average crude oil prices) high, but still much lower than last year. Last year, the average WTI spot price was around $65 during May and June, nearly $40 less than what is projected for this year. However, the retail margin last year averaged $1.55 per gallon over those 2 months last year, while this year it is expected to only average about $1.15 per gallon. If retail margins this year end up being closer to last year’s and/or crude oil prices higher than currently projected (and the WTI spot price as of yesterday was about $10 higher than our current projection for May and June), U.S. gasoline consumers may end up wishing winter was just around the corner.