Booming diesel-fuel use in Europe and Latin America is paying off for U.S. drivers, as gasoline prices fall to a nine-month low.
October supplies of gasoline are at a three-year high for that month, but refiners are still running at high speed because they are earning fat profits exporting diesel, which is made using the same process that converts oil to gasoline.
U.S. refiners are supplying diesel to rebounding European economies where it is the main fuel used by cars and trucks. South America is another expanding market where local refiners can't match rising demand. Meanwhile, U.S. drivers' demand for their main fuel, gasoline, is coming off its summer peak.
The result is a glut of U.S. gasoline that is driving down prices at the pump. A gallon of regular gasoline cost an average $3.35 on Monday, down 14 cents in the last month and hovering at their lowest level since January, according to AAA. The automobile club predicts retail prices could drop another 15 cents to 20 cents by the end of the year.
"Now I smile when I buy gas," said Chris Miller, 52 years old, an engineer from Wilton, Conn., visiting Midtown Manhattan.
The drop in gasoline prices is a boon for U.S. consumer confidence at a time when the economy is on uncertain footing, following the partial government shutdown and debt-ceiling fight in Washington.
Some investors expect the cost of the fuel to fall even further. Gasoline futures have slid 15% in three months, to $2.6538 a gallon Monday.
James Cordier, president of Liberty Trading Group in Tampa, Fla., said he sees futures falling by another 30 to 40 cents. He plans to bet on the decline in the options market.
"The exports of diesel fuel [are] a huge new dynamic," Mr. Cordier said. "You're turning all that oil into gasoline but all that demand is not there."
If refiners produced only gasoline, they would have scaled back production months ago, analysts say. The profit of refining gasoline from a barrel of crude, known as "the crack," was $12.39 on Monday, about half what it was a year ago. Earlier this month, the crack fell below $6 a barrel, to nearly a three-year low.
But U.S. refiners are increasingly taking their cues from the export market, and the boom in domestic oil production gives them access to cheap crude, allowing them to undercut rivals in Europe, where crude prices are higher.
In the week ended Oct. 11, U.S. fuel exports were a record 3.4 million barrels a day, mainly due to a surge in shipments of distillate fuels, including diesel, according to the Energy Information Administration.
Furthermore, profits from diesel production are on the rise, hitting a five-month high of $27.40 a barrel on Monday.
Refiners "try to maximize what's seasonally in vogue and with diesel demand from Latin America increasing…they will end up with more gasoline," said Robert Yawger, director of energy futures at Mizuho Securities USA in New York.
To be sure, some investors believe gasoline prices are close to hitting bottom. Refiners have started to cut back on the amount of oil they process, potentially a sign that falling profits from producing gasoline are starting to pinch. U.S. refiners operated at 86.2% of capacity in the week ended Oct. 11, down from 92.5% a month earlier, according to the EIA.
Refiners "will have to start switching…away from gasoline, taking away from the excess supplies that sit in the market right now," said Alan Harry, chief executive and portfolio manager of the Spartan Commodity Fund.
Sarah Brown, 35, a clinical research associate from Cary, Ill., hopes Mr. Harry is wrong.
"I'm happy they're down and I hope they stay down," Ms. Brown said while visiting New York's Rockefeller Center.
With the gasoline market nearing its winter lull, many investors see much bigger price declines in store.
"I don't see gasoline turning it around today. There's a ways to go" before supply and demand are in balance again, said Todd Gross, chief investment officer of Qeri LLC, a New York investment firm that specializes in energy.
