By Tina Vital
The recent rise in retail gasoline prices was expected to stunt demand during the summer and pull down refiner's earnings, but people are still buying gasoline at the pumps. U.S. gasoline demand is 4% higher than last year's level and S&P thinks robust demand ahead of the summer driving season will boost growth, particularly if recent reassuring U.S. economic indicators hold up.
Price spikes still are likely this summer. Inventories still are at historically low levels, and more unanticipated refinery mishaps -- such as the recent fire at a Tosco facility in California -- could spark a rise in prices. Furthermore, rising demand, tight supplies of reformulated gasoline (required at one-third of U.S. pumps) and a lack of pipeline capacity in the Midwest could cause price hikes in certain regions.
Crude oil prices should continue at lofty levels, and average $29 in 2001 and $27 in 2002. The peak for crude should arrive in June at above $31. Gasoline prices are recalibrating into a higher level of demand. Demand has grown by 10-15% since 1997, but prices haven't kept pace. Nationwide retail gasoline prices averaged $1.68 a gallon last summer, rising above $2.00 in Chicago and San Francisco. This summer, S&P sees gasoline prices topping last summer's high -- reaching above $1.70 a gallon on the average and way above $2.00 in some cities.
But if prices remain high, demand could soften, which could put an end to refining companies' long winning streak. Also, the increase in gasoline imports and a larger-than-expected hike in refinery production over the last couple of weeks may help moderate retail gasoline prices.
S&P likes some big refiners that will benefit from high U.S. and European refinery margins due to limited refining capacity. S&P has a 5 STARS (buy) recommendation on ExxonMobil (XOM ), the largest publicly owned oil company in the world.
S&P holds 4 STARS (accumulate) recommendations on Amerada Hess AHC , which markets gasoline primarily on the U.S. East Coast; Conoco Inc. (COC.B ), which markets gasoline in Western Europe and in the U.S.; and USX-Marathon (MRO ), which operates Speedway stations in the Midwestern U.S.
Tina Vital is an oil & gas industry analyst for Standard & Poor's