Check your travel apps. Get the oil changed. Map out your vacation route. Driving season is just around the corner.
The unofficial kickoff of driving season begins Memorial Day weekend. It is the first major driving holiday the summer and considered a key test for companies that refine oil: have they produced enough of the mandated summer gasoline to meet expectations of very high demand?
Consumers have been treated to low gas prices in the past year. Now, crude oil may have marked out a bottom after nearly two years of steadily falling prices, reaching a six-month high this week.
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“Gasoline and oil prices have set new yearly highs as the imbalance of supply and demand may begin to shift as global oil production shows signs of slowing and gasoline demand is accelerating,” says Patrick DeHaan, a Chicago-based senior petroleum analyst at GasBuddy.com.
While oil inventories in the U.S. remain well-supplied for now, they are likely to start receding as refiners begin throttling up their operations after maintenance season, DeHaan says. “Americans appear ripe to consume near-record levels of gasoline, if not the highest levels ever this summer with some of the lowest summer prices seen in 10 years or so.”
What can you expect at the pump? The national average for summer for a gallon of gas will be between $2.10 to $2.35, barring any unexpected global events or major hurricanes, DeHaan says. That would be the cheapest gas since the summer of 2004.
Not all states are created equal when it comes to gasoline distribution and sales. “Regional or even local hotspots may emerge as always. California will likely lead the Lower 48 with the highest summer gas prices, while the Gulf/South will generally feature some of the lowest, including Texas, Oklahoma and South Carolina,” DeHaan says.
Gasbuddy’s estimates are slightly higher than the Energy Information Agency forecast of $2.04 per gallon, which is down from an average of $2.63 last summer. The historical pattern is for gasoline prices to rise during the summer months due to increased demand from vacation travel and road trips.
“Even though gas prices are expected to be lower than last summer, they have been increasing on a month-to-month basis. In February, gas prices were averaging $1.76 per gallon, in March it was $1.93 per gallon, and this summer, they are expected to be $2.04 per gallon. On an average basis, it looks like gas prices are following historical trends,” says David Yepez, investment analyst at Exencial Wealth Advisors in Oklahoma City.
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More Americans are expected to hit the road this summer, fueled in part by low gas prices.
“Last year, miles driven increased by 3.7 percent. So far this year, miles driven has been increasing in low-to-single mid-digits. People are buying more trucks and SUVs than small cars, so that is increasing fuel consumption,” Yepez says.
Boomers hit the road. Changing demographics in the U.S. are also impacting fuel demand trends.
“More baby boomers are hitting retirement age and taking more trips. We’re seeing them traveling to other countries, so airline companies are using more fuel. Also, the boomers are taking trips on cruise lines. Fuel consumption is increasing not only because more miles are being driven but because there is more usage among airline companies and the cruise industry as well,” Yepez says.
Gas demand could hit a record this summer. Currently, 2007 holds the record for peak consumption, but as prices are expected to remain relatively low, demand may peak between 9.5 to 10 million barrels per day, which could be higher than 2007’s 9.4 to 9.7 million barrels per day, DeHaan says. “I do believe Americans will flood the nation’s highways this summer, thanks to a healthy economy and cheap gas.”
Options for investors. Investors looking to capitalize on increased gasoline demand can consider oil-refining companies. “The best refineries will be those positioned to process cheaper Bakken or Canadian crudes with plenty of access to pipelines,” DeHaan says.
Marathon Petroleum Corp. (ticker: MPC) is one of the largest independent refiners and petroleum marketers in the U.S. S&P Global Market Intelligence rates Marathon a “buy” and pegs a 12-month target price at $46 per share. “The company possesses above-average refining complexity, which allows it to process a large amount of lower-cost heavy and sour crudes,” says Stewart Glickman, head of energy research at S&P Global Market Intelligence.
Valero Energy Corp. (VLO) is the world’s largest independent petroleum refiner and marketer. It is also ranked a “buy” by S&P Global Market Intelligence, with a 12-month price target at $67. “We see Valero as the largest Gulf Coast refiner, benefiting from the increasing supplies, which should lead to lower input costs, creating a cost advantage. Valero will likely gain from higher global gasoline demand, and VLO has significant available capacity to boost exports if so desired,” Glickman says.
EOG Resources (EOG) is an energy exploration, production and marketing company in the U.S. and internationally. Within the U.S., it’s the low-cost producer with high-quality assets in the Eagle Ford and Permian Basin, Yepez says. “We can blame this period of oil oversupply in the market on EOG because they were the first ones to implement the horizontal drilling technique. EOG Resources is ahead of the competition in terms of technology, vertical business integration, and management team.”
Schlumberger (SLB) is a global leader in oil services, including project management, drilling and production. Schlumberger holds the most patents and technologies in the service energy sector, Yepez says.
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“They’re continuing to take market share from competitors because they can provide a bundle of services to exploration and production companies that are unique in the market,” he says. “In this period of lower prices, customers are turning to SLB to reuce their costs and improve production efficiencies. Schlumberger has a dividend yield of 2.5 percent and offers long term value at current prices.”
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What to Expect at the Pump This Driving Season originally appeared on usnews.com
