SAN FRANCISCO – Gasoline and heating oil consumers are just waiting for those record oil prices to hit the fan.
Crude futures prices peaked over $80 a barrel last week, a level never before seen during a regular trading session on the New York Mercantile Exchange, before backing off to close last week near $79.
The record prices are starting to torture consumers with questions of when and how the oil rally will impact spending on gasoline at the pump and heating oil at home as the winter season approaches.
"We're going into this heating oil season the same way we went into the summer driving season, with supplies well below normal," said Phil Flynn, a senior analyst at Alaron Trading.
In a month, heating-oil futures have climbed 11.7% to record levels, reformulated gasoline futures are up 7.8%, but retail gasoline prices gained only 1.6%.
And during that time, crude futures prices have jumped around 12%.
"Refinery rates have not kept up with the need to produce more gasoline and heating oil," said Thomas Hartmann, an analyst at Altavest Worldwide Trading.
U.S. refinery utilization stood at 90.5% of capacity for the week ended Sept. 7, the Energy Department reported last week. That was down from 92.1% a week earlier.
As a result, supplies of motor gasoline are down 9.6% from the year-ago level and distillates, which include heating oil, are down 8% from a year ago, data showed.
Crude supplies are still 1.4% above the year-ago level, yet crude has managed the biggest price gains.
There's no doubt that there's a bit of a disconnect here.
And that "disconnect in crude and the products definitely looks like tradable opportunity," said Zachary Oxman, a senior trader at Wisdom Financial.
"Consumers should be worried," said Alaron's Flynn. "We'll be keeping our fingers crossed that we'll meet demand this winter" for heating oil.
"The margin for error going into the season is going to be very, very thin," he said.
Indeed, many analysts see heating oil supply levels as a problem to keep a close watch on.
"Each winter for the last five years or so, we've continued to operate without a safety net in so far as heating oil goes, and this year is not an exception," said Tom Kloza, chief oil analyst at the Oil Price Information Service.
Futures prices for heating oil are already at an all-time high.
The benchmark October contract closed at an all-time high of $2.2191 a gallon on last week.
The previous record price for a front-month futures contract was seen at $2.21 in the aftermath of Hurricane Katrina in September of 2005, according to Flynn.
"Winter hasn't even started," he said. If the market sees an early cold front — say in December, heating-oil prices could rally past $3 a gallon, he said.
For now, consumers can look on the bright side. "This is a low demand period for gasoline and heating oil," said James Williams, an economist at WTRG Economics.
And "if there is a recession, it will push prices lower," he said.
As for gasoline, the story is similar to heating oil, but maybe not as worrisome, according to most analysts.
"Gasoline prices are certainly lagging behind the other energy markets as the summer driving season is ending and demand should pull back," said Hartmann. "This is partially offsetting the recent drop in gasoline stocks, which are expected to stay below normal inventory levels for this time of year."
Kloza considers gasoline to be in an "ebb tide," partially because of that normal demand drop after Labor Day.
But gasoline supplies are below normal — at around a two-year low, so consumers should be worried, said Flynn.
Keep in mind that the "the typical correlation is that for every dollar per barrel increase in the cost of crude oil, there is a corresponding rise of about 2.5 cents per gallon at the gas pump for the consumer," said Sean Comey, a spokesman for AAA of Northern California, Nevada & Utah.
That means that "the increase in the cost of crude over the last month, if it holds for a while, would likely translate to an additional 20 cents per gallon for consumers, if none of the other forces, like demand and profit margins, change," he said.
And if a hurricane cuts a significant amount of production in the Gulf of Mexico and the economy firms up, prices are going to continue to move higher, said Flynn.
Most likely, however, the market won't see record high retail gasoline prices again this year, he said.
The highest retail price ever recorded was $3.227 a gallon from May 24 of this year, according to data from AAA's Daily Fuel Gauge Report, which is compiled by Kloza's OPIS. <a href="http://www.fuelgaugereport.com/">See the data.</a>
"It'll take some sort of event to get to that level," said Flynn.
At the same time, Kloza predicts that ethanol will soon turn heads again in the fuel market.
He points out that ethanol prices are, in many cases, 40 cents to 60 cents a gallon below gasoline blend stock values.
The low ethanol prices are "going to have a big impact on U.S. gasoline prices," he warned. "Some marketers and suppliers are looking at installing logistics to blend 10% ethanol in places that haven't seen it before."
The price of ethanol was twice or even thrice the price of gasoline some 14 months ago, but now ethanol's in the $1.50 level for 2008, while gasoline is in the $2 a gallon-plus range, he said.
So, "it's tough to get too excited about the RBOB contract when there is an alternative fuel that is trading so much more cheaply," he said. RBOB stands for reformulated gasoline blend stock for oxygen blending.
Given that, "we've absolutely seen the 2007 top for gasoline prices (barring war or massive hurricane strike on refining)," Kloza said.
But the record oil prices leave the commercial economy open to worry.
"Drivers may see lower pump prices for gasoline even as they hear about crude...hitting $80 per barrel, but the real damage could be forth coming in the commercial economy," said Kloza.
It's there that "some of the highest prices since Hurricanes Katrina and Rita are likely to occur shortly," he said.
Diesel prices stood at $2.965 a gallon last week, according to AAA's Daily Fuel Gauge Report. That's up about 3 cents from a month ago. The record level was $3.239 from Oct. 24, 2005.
The trucking industry is "absolutely concerned with high fuel prices, especially now that we are moving into our peak season," said Tiffany Wlazlowski, a spokeswoman for the American Trucking Associations, a national voice for the trucking industry.
For many motor carriers, the cost of fuel is the second-highest operating expense and equals as much as 25% of operating costs, she said.
And trucking is projected to spend more than $107 billion on fuel this year, she said. That compares to $94 billion in 2006 and $85 billion in 2005.
Railroads are worried too.
Passenger railroads see both disadvantages and benefits from high oil prices, said Cliff Black, spokesman at Amtrak, who added that the rail operator is "certainly" concerned when the cost of crude goes up because diesel prices follow.
But, "higher crude-oil prices almost play into Amtrak's hand," he said. "Rising fuel prices affect automobiles, buses trucks and airlines much more than railroads, because of trains' inherent fuel efficiency." Amtrak has seen a "surge in ridership and revenue," which Black said is partially attributable to those rising fuel prices.
Class I freight railroads, which are defined as railroads with at least $319.3 million in annual revenue, spent $8.1 billion on fuel in 2006, up from $6.2 billion in 2005 and $4.4 billion in 2004, according to Tom White, a spokesman for the Association of American Railroads.
"Diesel fuel consumed more than 16% of revenue last year, making it the industry's second largest expense after labor," said White.
Beyond that, "there is also concern about the impact high fuel prices can have on the economy," he said. "After all, if the economy doesn't produce it, railroads can't move it."
Copyright (c) 2007 MarketWatch, Inc.