Gasoline belatedly takes role of summer oil driver

LONDON/NEW YORK (Reuters) - Investors have been slow to make their seasonal move into gasoline ahead of the U.S. driving season, but now have helped to push oil to six-month highs and are likely to keep providing modest price support.

Economic downturn and the credit crunch had warded off the investors that typically bet on a summer upsurge in gasoline use in the world's biggest fuel burner.

U.S. demand is still lagging year-ago levels, although cheaper fuel prices are expected to provide a spur and consumption of gasoline has been higher than that of other refined products.

Countries such as China, where economic growth has remained positive, and Iran, which lacks its own refining capacity, have also provided support, analysts said.

"It is still difficult to call it a strong market. But at least the gasoline market is balanced or getting close to being balanced," said Oliver Jakob of Petromatrix.

Benchmark U.S. RBOB gasoline futures have risen to six-month highs above $1.70 a gallon, breaking Goldman Sachs' 12-month target. Since the end of April, it has risen by around 14 percent.

U.S. crude, which hit a six-month high of nearly $60 on Tuesday, had also risen by around 14 percent between the end of April and Monday's closing price.

Its crack, or premium, to U.S. crude futures showed even more strength, rising to above $14 a barrel last week, compared with only $8-$9 in early May last year.

Earlier this month, the front-end of the RBOB curve flipped into backwardation -- a market structure meaning prompt supplies are more expensive than those for later delivery and indicative of stronger prompt demand.

The switch from the more bearish structure of contango happened a month later than last year.

"Speculative buying interest rebounded amid firm cracks on RBOB futures," said Harry Tchilinguirian of BNP.

"The resilience of the gasoline crack in this context is surprising, but as long as it is sustained, so will the interest for go long gasoline futures relative to crude."

FOCUS ON THE BULLISH

He said that although inventory levels were higher than a year ago, traders had chosen to focus on week-on-week falls in U.S. gasoline stocks over the past several weeks as indicators of a strengthening trend.

Similarly, Chris Lafakis, an economist with Moody's Economy.com., said even though U.S. gasoline demand had remained below year-earlier levels, the gap had been narrowing.

"Gasoline demand hasn't been as bad as people thought it would be," he said.

The latest government data showed U.S. gasoline demand over the four weeks to May 1 was 0.9 percent below a year earlier, while middle distillate demand was down 14.1 percent.

In previous years, the U.S. driving season -- which is regarded as beginning with the Memorial Day public holiday in late May -- has absorbed the equivalent of a tenth of the world's global crude production.

Typically, gasoline leads global oil markets from around March/April until demand peaks in July.

It can coincide with major arbitrage shipments of gasoline from Europe to the United States.

So far this year transatlantic sales have been limited, although freight rates for the crossing have now risen to about three-month highs as U.S. import demand has begun to increase.

"The market has risen and there is continued activity," said Simon Chattrabhuti, head of Tanker Research at ICAP Shipping.

Petromatrix's Jakob said demand from China and Iran had also lent support to the gasoline market.

China's car fleet has been shifting to diesel, but its growth in gasoline demand is still outpacing that of most other countries.

Iran is an OPEC oil exporter, but relies on gasoline imports because of its lack of refining capacity. An Iranian official told Reuters earlier this month its gasoline demand was rising by 6 percent a year.

The strength of gasoline is only relative.

The deep fall in crude prices from last year's record of nearly $150 has created some demand from drivers, but consumption of other refined products is still weak in response to the deep economic downturn.

Jet fuel could suffer further if the spread of the H1N1 flu virus, commonly known as swine flue, discourages people from flying. In turn that could add to the number of people who already prefer to drive rather than fly to a costly and distant destination.

"People will drive to the closest lake for holiday rather than flying far to the Caribbean because at the end of the day it is cheaper," said Andy Sommer, oil analyst with EGL in Switzerland. "That will increase gasoline demand a bit."

(Additional reporting by Jonathan Saul; editing by Barbara Lewis and Sue Thomas)