Rising Gas Prices Painful for Drivers, but Not for Slumping Refiners

Maria Nunez, a Bronx resident who travels 45 minutes a day to and from her Americans, Nunez is preparing for even more costly visits to the filling station as babysitting job on Long Island, is feeling the pain at the pump. And, like many summer driving season kicks off this weekend.

"A few months ago, I was paying $1.31 a gallon and now I'm paying $1.72 a gallon," said Nunez, 57, as she filled up her white Mustang with premium unleaded at a gas station in Manhasset, N.Y. "When's it going to stop?"

According to the Energy Information Administration, not so soon. Retail prices are expected to average $1.46 a gallon nationwide for regular unleaded gasoline. That would be 25% higher than last summer's average of $1.17 a gallon. Over the last three weeks, the average nationwide price of unleaded regular gasoline has risen 11 cents to a high of $1.53 a gallon, foreshadowing a particularly good quarter for the oil refiners.

Pressure at the Pump Average National Self-Service Regular Gasoline Prices

* Time frame begins March 1999 ending May 2000. Source: Lundberg Survey

On Friday morning, New York Harbor unleaded gasoline futures were down slightly after hitting a nine-year high on Thursday. June futures were lately trading down at 0.5 cents, or 0.4%, at $1.0075. On Thursday gasoline futures closed at $1.0121, approaching the $1.0176 level reached in September 1990 during the Persian Gulf crisis. And analysts believe there could be more upside potential before the market turns around.

While Americans make adjustments, such as filling up their tanks with regular unleaded gasoline rather than premium unleaded, oil refiners are looking forward to having their day in the sun, following a two-year slump.

After a glut of crude oil last year that caused drillers to cut supply, gasoline inventories are now low. And profit margins, which have been narrow, are widening as the spread between crude oil prices and gasoline prices has increased to more than $10 a barrel from as low as $3 a barrel in the first quarter.

The rising margins come even though crude oil prices have risen in the same period from a low of $24.22 a barrel in January to the current level of $29.90 a barrel.

"Looking ahead, we believe gasoline is likely to remain strong this quarter," said Marianne Kah, chief economist at Conoco. "Downstream operations have improved."

Fadel Gheit, an energy analyst at Fahnestock, said he is most optimistic about the prospects for the independent refiners, which have a tendency to ride to the top of the wave's crest and then crash along with it. Integrated oil companies can offset some of the volatility with their discovery and exploration activities.

Gheit named Ultramar Diamond Shamrock (UDS Quote), Valero Energy (VLO Quote), Tosco (TOS Quote) and Sunoco (SUN Quote), as companies he particularly favors. He rates each of them a buy. Fahnestock does not do underwriting.

After a phenomenal first quarter, Gheit said the independent refiners still have a lot of steam left to post strong second-quarter earnings, adding that the stocks have yet to fully reflect the improvement in the earnings outlook. For example, Houston-based Ultramar is currently trading at less than eight times forecasted 2000 earnings despite stronger-than-expected first-quarter results that prompted analysts to raise their targets for the second quarter.

Analysts expect Sunoco's second-quarter earnings to hit $1.15 a share, more than 10 times its results in the year-earlier period.

For the time being, no one expects gasoline prices, which have been even more buoyant than those of crude, to falter. With high prices at the pump and inventories at their lowest level since 1997, refiners are ramping up production just as quickly as they can. In order to meet demand, these companies are likely to increase production to the point where they are refining to a very high 97% of incoming crude.

That means that explosions and fires, the basic facts of refining life, could cause gasoline futures to move ever higher.

But some analysts said that some of the price pressure will be offset as futures buyers start liquidating some of their positions.

"Price action in this market has gotten somewhat ahead of what can happen," said Tim Evans, a senior energy analyst at Pegasus Econometric Group. "With a lot of the potential tightness built in, there is over the next three to four weeks the potential for disappointment."

Evans added that oil prices might still have some upside potential but added that some time in June they would likely start heading back down to the mid 80-cent range as oil refiners start making more supply available to the gas stations.

"I think the way you could characterize it is the situation is serious, but the prognosis is hopeful," Evans said.