By Brian L. Milne is the Refined Fuels Editor for DTN
Double-digit declines were reported in virtually every large metropolitan gasoline wholesale market across the United States during the third full week of February. The question becomes will the steady increase in retail gasoline prices, which have moved higher in every week in 2009 except for one, continue this week.
The answer is not likely, but the drop in wholesale gasoline values does not automatically trigger a decline in retail prices due to various cost or savings pass through timeframes inherent in commodity markets. What the consumer will likely encounter is mixed prices for gasoline at their local outlets during the final week of February, with many regions holding pump prices unchanged. Drivers in Chicago, Detroit and Milwaukee, however, should expect a decrease at the pump after retail prices there surged higher.
Wholesale gasoline prices moved sharply lower in the upper Midwest region, and the reason why wasn’t entirely clear, but market observers suspect suppliers were destocking winter gasoline grades that cannot be used during the summer months which triggered a sell-off. Wholesale markets are now transitioning to a summer gasoline grade which has a lower evaporation rate measured by a Reid Vapor Pressure rating, with gasoline releasing volatile organic compounds at a greater rate during the warmer summer months.
So, instead of storing a winter grade gasoline for the next several months, and incurring what is called the carry costs of doing so, the discussion is that suppliers slashed prices to move out product.
Demand Creeping Up Nationally, gasoline supply increased in mid-February, but does remain below the year-ago inventory level as refiners remain cautious of overproducing amid the current dreadful economic time we now endure that suggests lower gasoline demand. Nearly five million people are collecting unemployment, with that number widely expected to increase, which means fewer drivers making the roundtrip from home to work.
However, an interesting statistic emerged that shows gasoline demand increased in January and during the first half of February compared with the same time period in 2008. The reason ascribed is because of lower gasoline prices showing that Americans will drive more if gasoline costs less.
So now, we have two indicators offering competitive views. Higher unemployment has typically meant less demand for gasoline, while lower gasoline prices have meant an increased gasoline consumption rate. The answer, we are sure to find out, will be at what price level will consumers now react by conserving on gasoline demand? It surely will be below $4 gallon, but expect gasoline prices to move closer to a $2.50 gallon average nationally over the coming weeks from $2.07 gallon now.
About the Author
Brian L. Milne is the Refined Fuels Editor for DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for nearly 14 years as an analyst, journalist and editor. He can be reached at [email protected].