Fuel Price Outlook: Mixed to Higher

Summer gas demands have already surpassed EIA predictions.

Retail fuel prices will be as high or higher than last summer." That was the safe prediction of Blaine Duxbury at Farm Progress Companies' recent Technology Summit.

Duxbury, price risk manager for Indiana-based Countrymark Cooperative, reported that early spring gasoline demand was the highest on record. In late April, Countrymark had a 21-day supply for its retail outlets. "That's low, and refinery supplies are dropping. Refinery use rates have dropped to the five-year average low."

Unexpected refinery outages over the last two months, higher demand and lower imports from Europe are to blame for the price run-up, according to the U.S. Energy Information Administration. Retail pump prices have already surpassed EIA projections for this summer.

Demand for distillates – diesel fuel and heating oil – are following last year's track, notes Duxbury. But slumping refinery production into March kicked up U.S. prices. Domestic refineries are making a quick change-over to ultra-low-sulfur diesel, he adds.

What's ahead?

Gasoline: EIA projects retail prices will begin tailing off by September to an average pump price close to $2.78 a gallon and close to $2.44 by year-end. Surging ethanol production in the second half of this year may have a role in the decline.

Diesel fuel: On-highway diesel prices may not exceed last summer's prices. EIA pegs the U.S. average price at $2.82 a gallon for the summer. Distillate stocks are projected to rise this summer to 5-million barrels above the five-year average.

Natural gas: Fed by electric power cooling demand, EIA expects natural gas prices to rise slowly through summer. Then prices will accelerate during the third-quarter peak of cooling season, and again when spot prices begin their climb toward a winter peak.

EIA projects Henry Hub spot prices to average about $7.83 per million cubic feet in 2007 - 89 cents higher than 2006, and $8.11 in 2008. That has immediate pricing implications for farmers with storage for grain drying fuel.

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