July crude drifted 4 cents lower in lackadaisical trading, settling at $30.67 per barrel and consolidating gains made Monday when prices jumped $1.15 higher on concerns that OPEC was ready to cut production later this month in response to optimistic reports that Iraq would soon resume exports.
While the timing and amount of crude Iraq would be able to produce remains somewhat elusive, any cuts made by OPEC during the summer driving season in the huge U.S. market would have a major bullish impact on both crude and gasoline prices.
"Refiners are running at near full throttle -- utilizing more than 94 percent of capacity and 15.8 million barrels per day of crude throughput -- to capture the historically strong summer margins (profits)," said Bryan Caviness, a director at the bond-rating firm Fitch. "The key issue to sustaining the strong margins seen in the first quarter is the refining sector's ability to control production."
Inventories of both crude and gasoline have remained on the low end of normal for early summer, so any reduction in the amount of crude available would quickly add to the cost of gasoline production and reverse the steady easing of pump prices seen nationwide since the start of the Iraq war.
The market will get a look at the current supply picture on Wednesday when closely watched weekly inventory reports are released by the American Petroleum Institute and the U.S. Energy Information Administration.
Meanwhile, the longer-term future of the U.S. fuel supply seemed to come into sharper focus Tuesday when the Senate voted against a pair of amendments to the Energy Bill that would have possibly slowed the growth of ethanol as a key ingredient in gasoline production.
Sen. Dianne Feinstein, D-Calif., had offered two measures as part of the bill's Renewable Fuel Standard that would have made the use of ethanol as an oxygenate in gasoline an option for states rather than a requirement.
The first amendment, defeated 61-34, would have allowed states to obtain a waiver from the EPA's oxygenate requirements if they felt they could meet Clean Air Act standards without using either ethanol or its petrochemical cousin, MTBE.
MTBE is in the process of being phased out due to potential health concerns, which has some states and refiners warning that gasoline shortages could result.
The second Feinstein amendment would have given state governors the option of opting out of the Renewable Fuels Standard entirely, but it failed 62-34.
"There is a broad, bipartisan coalition behind the RFS fuels agreement because it is good public policy," said Bob Dinneen, president of the Renewable Fuels Association (RFA), a lobbying group for the ethanol industry. "It addresses environmental concerns, gasoline price concerns, energy security concerns, and economic development concerns."
The RFA opposed Feinstein not only because it would cost ethanol producers market share, but would also result in a continued "balkanization" of the nation's gasoline supply that would prevent the states using one oxygenate from importing fuel to a state that uses the other.
Ethanol standards are one of the points in the Energy Bill that the Senate is gradually working out. Sen. Pete Domenici, R-N.M., chairman of the Senate Energy Committee, told reporters Tuesday that he expected the Senate to complete its work on the bill in around 8-10 days.
"We've got to get it done in that much time," Domenici said, predicting the Senate's action on the measure would soon pick up steam and quickly send the measure to the House-Senate conference committee. "What's happening now is the typical slowpoke start-up. As soon as the senators start voting tonight, I would guess we will have as many as four, maybe five votes, and I would think that would precipitate a myriad of votes tomorrow and the next day, and we'll be on the way."