Gas Trade Turns the Tables

"It is still unclear whether the high margins last year were justified by the fundamental data or whether it was un unfounded fear that refiners would not be able to make the conversion in time for the summer driving season," Jim Williams, energy analyst at WTRG Economics in London, Ark., wrote in a report.

Traders appear to be relying on historical data from 2004 and 2006 to forecast the price direction for gasoline, according to Williams. These traders aren't accounting for the fact that all U.S. refineries are now retrofitted to use ethanol instead of MTBE. Thus, refiners don't need to keep abnormally large inventories of gasoline on hand, and traders don't need to bid up the price of gasoline as much.

Regardless, gasoline crack spreads, which normally rest around 25 cents a gallon, are now approaching 40 cents or higher. (Underscoring the volatility of recent months, spreads plummeted to around 10 cents in less than a week in September.)

Analysts at Merrill Lynch confirmed the upward trend in a report released March 19, saying that they were revising their "gasoline crack spread forecast to $20.20 a barrel (48 cents a gallon) from $15.80 a barrel (37 cents a gallon) on the back of stronger-than-expected global light product demand in the transportation and petrochemical sectors and low gasoline inventories in Europe" for the second quarter in 2007.