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Gasoline Prices May Be Getting Close to a Peak

Despite the talk of $5 or $6 a gallon gasoline, some experts say prices at the pump may be close to peaking and probably won’t average much above $4 a gallon this spring.

$4 Gas in California
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$4 Gas in California

There are a number of factors pointing to an approaching top in retail gasoline prices, even though inventories continue to be drawn down and prices continue to rise. Different regions of the country have also been experiencing wildly different prices, with the highest prices now on the West Coast, Midwest and Northeast.

So, while some consumers have already paid in the upper $4or even $5 range for a gallon of gasoline, the national average at the pump for regular unleaded gas is $3.93 per gallon, 23 cents higher than this time last year, according to AAA.

“It’s a tough market to gauge and there’s different signals the market is sending out. I think it’s fair to say there’s an emerging consensus that we may be close to a peak price and we should start to see prices decline on gasoline, diesel fuel, finished product and even conceivably on crude oil,” said Ben Brockwell, director of data pricing and information services at OPIS.

“Prices in the bulk supply (wholesale) markets are dropping. On the West Coast, those average prices are down more than 25 cents in three weeks and you’re going to start to see those California retail prices come down, the same in the Midwest,” said Brockwell. He said Gulf Coast and Northeast prices could stay higher for now because of the cost of shifting to more expensive summer grade gasoline during April.

“The bottom line is we do still think the retail national average is going to hit $4 and it’s probably going to do that in the next week or 10 days, but it’s now questionable in my mind whether we will match the all-time retail average of July 2008, when gasoline hit $4.12 a gallon,” Brockwell said.

After that, he sees prices heading back to an average $3.50, but probably not the $3 per gallon level.

“You have a number of things that are starting to line up that are affecting the market,” said Andy Lipow, president of Lipow Oil Associates. “One is that crude oil inventories are now about 2 percent higher than this time last year. Gasoline inventories are now 3 percent higher than this time last year. Although there have been a couple of delays, we’re seeing the return of refineries from maintenance and operating rates and the production of gasoline is increasing.”

Oil prices are off the year’s highs, reached at the end of February. West Texas Intermediate, trading at $103 Thursday, reached a high of $110.54 Feb. 29, and Brent touched $128.38. It was trading at $123 Thursday.

Oil had risen on concerns that sanctions against Iran would take too much oil off world markets, or even prompt Iran to take some action to shut the Strait of Hormuz, a critical artery for oil shipping. But it has since backed down amid global growth concerns, a strengthening dollar, and signs of ample global oil supply. The price has also been impacted by speculation that governments, including the U.S., will tap strategic oil supplies.

That doesn’t mean prices could not make an abrupt about face, if tensions surrounding Iran’s nuclear program once more begin to rise. But oil experts are predicting for now that oil may be holding steady or even heading lower, into the upper $90 range for West Texas Intermediate.

John Kilduff of Again Capital said with rising oil prices, the profit from refining a barrel of crude has risen to a record level $36.29 for WTI crude, used in Gulf Coast and Midwest refineries. The profit from a barrel of Brent, the more expensive international oil used in East coast refineries, is at $17 a barrel, he said.

“It’s an inducement for refiners to really ramp up and capture the differential,” he said. Kilduff said refiners are already increasing production and that should help contain prices.

He also said lower crude prices will help. “I can’t speak enough on how production trends favor lower prices,” he said. “As for the Iraqis, you heard them say they’ll be able to cover the Iranian crude supply. The Saudis have upped production. Our production is higher. It’s going to be interesting to see what pipeline reversals do. A lot is happening,” he said. The Enbridge Seaway pipeline is in the process of being reversed so that it will bring oil from the midcontinent to the gulf coast refiners.

“Crude oil prices seem to have stalled out. You saw a nice rise in the refining activity in last week’s report. It got back to 85 percent, and typically as we get deeper into April, that should be about it, as long as supplies seem sufficient for the summer, absent an Iran event,” Kilduff said.

Addison Armstrong of Tradition Energy, however, disagrees that gasoline is close to peaking because of the pressure from Brent prices. “If Brent stays high, I don’t think there’s a way we come back down. I think that’s what we really have to watch,” he said.

Another bearish case for oil prices was made by traders after the Energy Information Administration Wednesday reported a surprise build in oil stockpiles of 9 million barrels. It was the largest weekly increase in more than three years, and more than four times what the market was expecting.

The report also showed that oil stockpiles rose to 362.4 million barrels in the week ended March 30, the highest level since last June.

Another important trend in the report was the continuing increase in U.S. domestic oil production, which rose above six million barrels a day, for the first time since Feb. 2000. The U.S. production is 7.3 percent higher than in the same week last year.

Barclays analysts, in a note Wednesday, said the second quarter promises to be “calmer waters” for the oil market than the first quarter. The analysts said among the factors holding down oil prices are possible strategic stockpile releases and the unlikelihood of military escalation against Iran.

But they said other geopolitical risks remain, and the situation could quickly change. Analysts have said if the Iran situation escalated to military interaction, oil prices could quickly rise to $150 or even $200.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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