$4 gas?

Warmer weather means more chagrin at the pump this spring. The Energy Information Administration (EIA), the statistical agency within the US Department of Energy, will this Tuesday revise up a prior estimate that gasoline would peak at around $3.40 per gallon this spring.

Gasoline prices

While gasoline stocks and likely refinery availability appear to have improved relative to the year-ago situation, there is still another key element to consider: more expensive crude oil, which accounts for about two-thirds the cost of making gasoline. Gasoline may even hit $4 per gallon as warmer weather brings drivers back to the roads and markets see a pause in supply from refineries making their annual changeover from of winter fuel blends to more expensive summer blends.

West Texas Intermediate (WTI) crude oil prices, which averaged $72.32 per barrel in 2007, are projected to average $86.46 in 2008.
Regular grade gasoline prices, which averaged $2.81 per gallon in 2007, are projected to average $3.07 per gallon in 2008.
At the onset of the peak-driving season (March 31), total gasoline stocks are projected to be 218 million barrels, 12.5 million barrels above the 5-year average.
Based on current weather projections and forecasts of an economic slowdown this year, fuel consumption growth is projected to slow from 1.5% in 2007 to 0.8% in 2008.

Watching OPEC

The longer-term picture is brighter. The EIA writes that there should be an easing of the oil market balance in 2008. Higher production outside of the OPEC and planned additions to the cartel's capacity should more than offset expected moderate world oil demand growth and relieve some of the tightness in the market.

Surplus production capacity is projected to grow from its current level of less than 2 million barrels per day (bbl/d) to more than 4 million bbl/d by the end of 2009. This balance suggests some price softening, although delays or downward revisions in capacity additions in both OPEC and non-OPEC nations could alter the outlook, as could OPEC production decisions.