States in the upper midwest are feeling extra pain this week as mounting refinery malfunctions drive prices at the pump to record highs. Aside from the two Chicago-area breakdowns that were responsible for trouble earlier in the week, problems at refineries in Kansas and Oklahoma also served to exacerbate the situation. According to the USA Today:

“Gas prices in Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, Ohio, Oklahoma and Wisconsin have spiked up to 40 cents a gallon the past week alone…

While the USA may be dripping in new found crude oil deposits and early May supplies were at their highest levels since the early 1930s, issues at a handful of refineries that turn crude into gasoline and diesel fuel underscore how kinks in the supply chain can cause quick surges in what consumers pay at the pump.

In Minnesota, regular, unleaded gas averaged $4.15 a gallon heading into the weekend — an all-time state record. With some Twin Cities outlets now selling gas for more than $4.50 a gallon, making Minnesota the priciest state for gasoline in the continental U.S., overtaking California, which now averages $4.06 a gallon. In oil-rich North Dakota, prices average $3.98, also a record-high.

‘It’s amazing what problems refinery issues can cause,’ says Patrick DeHaan, senior analyst for price tracker gasbuddy.com. ‘If another refinery went down, all hell would break loose.’”

As Americans prepare to hit the road once again for the summer driving season, it appears as though there will be no relief for the immediate future. The Wall Street Journal reports:

“Rising crude-oil prices and tight supplies are among the factors that have recently pushed prices higher at the pump, according to AAA’s Daily Fuel Gauge Report. For 73 consecutive days the national average has been lower than it was on the same day a year ago…

The recent trend toward higher prices has affected most states, with only West Virginia and Ohio posting lower prices now than a week ago.  Prices in six states; Oregon, Minnesota, Washington, Oklahoma Nebraska and Iowa) have jumped by more than 20 cents, AAA said.”

This is yet another telling example of the power seemingly insignificant price shocks can have over large parts of the country. As more refineries switch away from their winter mix, more delays and malfunctions remain a definite possibility.

The most recent reporting of the Consumer Price Index found an unexpected drop in inflation – almost entirely attributable to the degree to which gas prices have fallen in recent months. CNN Money reports:

“The Consumer Price Index, a key measure of inflation, fell 0.4% in April, according to the Labor Department. Compared to a year earlier, prices are up only 1.1%, a level of inflation that’s considered rather low.

Falling gas prices were the main driver for the broader decline for the second month in a row, the Labor Department noted.

The average price for a gallon of unleaded gas fell by about 13 cents in April, ending the month at $3.51, according to AAA.”

However, this trend may represent some other issues in economic stability. According to the USA Today:

‘Subdued demand means that core inflation is likely to edge lower, as retailers will be forced to pass previous falls in raw material costs onto customers,’ Paul Dales, an economist at Capital Economics, said in a note to clients. ‘The Fed may soon put more emphasis on fading inflation trends.’

As evidenced by the sustained, region-wide rise in prices through much of the Northern Midwest, these overall trends are often bucked by short term price shocks. It is unwise for fleet managers and consumers alike to take lower current prices as an indication of future costs.

According to the regional American Automobile Association, the extended inactivity of two Chicago-area refineries is wreaking havoc on gas prices two states over. According to Minnesota Public radio:

“Gail Weinholzer, the director of public affairs for AAA Minnesota-Iowa, said due to the inoperative refineries, gas prices in the upper Midwest/Great Lakes region are spiking. She notes that the average price in Minnesota was $3.85 a gallon Wednesday morning, well above the national average of $3.59 a gallon.

‘We do not expect there to be any relief for the Upper Midwest/Great Lakes region until probably late June to early July,’ said Weinholzer.

Weinholzer said many stations in Minnesota are reporting prices over $4, including some in the Twin Cities charging $4.19 a gallon.

Unfortunately, there appears to be no hope for relief in the very near future. The Star Tribune elaborates on the depth and breadth of the problem:

…the high gas prices will remain with us for a while, possibly through the July Fourth holiday. Weinholzer [of AAA Minnesota] said reduced capacity due to the closures of two large refineries in the Chicago area is the main culprit in driving the prices up.

The two refineries, which supply much of the gas supply for the Upper Midwest, are offline and might not resume operations before Memorial Day, she said. Even then, there might not be any relief.

‘Restarting a refinery is not like flipping an electrical switch,’ she said. ‘It takes time to ramp up, and other issues, glitches can occur.’

Sudden price shocks like this serve as a persistent reminder to consumers and fleet managers everywhere. Although trends predict lower prices nationally through the summer, these common refinery problems can often cause large and unexpected fluctuations in prices all over a given region.

The Energy Information Administration forecasts domestic prices at the pump to remain lower through the summer of 2013 as a result of a spike in supply over the last several months. The EIA projects:

“Falling crude oil prices contributed to a decline in the U.S. regular gasoline retail price from a year-to-date high of $3.78 per gallon on February 25 to $3.52 per gallon on April 29. EIA expects the regular gasoline price will average $3.53 per gallon over the summer (April through September), down $0.10 per gallon from last month’s STEO. The annual average regular gasoline retail price is projected to decline from $3.63 per gallon in 2012 to $3.50 per gallon in 2013 and to $3.39 per gallon in 2014.”

The ramped-up exporting of domestic petroleum will also serve to exacerbate this trend. NPR reporter Daniel Karson reports:

“… increased U.S. petroleum exports could keep domestic prices from taking a sharp dive, despite a slight slump in demand.

‘U.S. refineries are also exporting a record amount of diesel and gasoline to developing countries, including China, where demand for diesel is through the roof,’ Diane reports.

Oil industry analyst Patrick DeHaan tells Diane that if gas companies ‘build domestic inventories too much, it will hurt their bottom line. Maintaining exports while not allowing inventories to grow out of control, is what they’re likely trying to accomplish.’”

Still, it is imperative to mind the potential for geopolitical developments to undercut currently forecasted trends. As the EIA notes in its own report: “Energy price forecasts are highly uncertain, and the current values of futures and options contracts suggest that prices could differ significantly from the projected levels.”

The best way to look at energy prices is through what is called the forward curve.  This is much more informative than the popular media reports of the front month spot price.  Sometimes the front month price moves, but the rest of the curve does not.

The curve for the month of May has moved to one of the lowest points seen so far this year, rivaling only March. Bank of America’s research division reports that low prices in much of the US can be attributed to an increase in domestic oil inventories.

Commercial crude stocks in the US are sitting at 395 million bbls, an all-time high level and only 37 million bbls away from what we estimate to be tested maximum storage capacity. True, stocks at Cushing, OK-the pricing point for WTI-fell to 49.8 million bbls in the last available report, briefly pushing prices above $96/bbl. But as other sites fill up, the Oklahoma hub may now hold nearly 45% or 16 million bbls of the country’s total tested spare capacity. As storage tanks continue to fill up, we see growing downside risks to WTI crude oil prices and timespreads Meanwhile, crude oil imports into the US are being displaced by domestic barrels.