By Brian L. Milne, Refined Fuels Editor for DTN
Retail gasoline prices will continue higher across the U.S. during the first full week of April, pushed up by increases in gasoline’s wholesale markets from coast-to-coast. Expectations are that gasoline prices will continue to edge higher through much of spring, which is typical.
The Energy Information Administration (EIA), which is the statistical arm of the Department of Energy, reported the U.S. average for regular grade gasoline at $2.046 gallon as of March 30, surging higher during the final week of March. Price forecasts expect the average to climb to between $2.25 and $2.35 gallon by June 1, and could even jump to as much as $2.50 gallon nationally by the summer.
However, no one is calling for retail gasoline prices to eclipse $3.00 gallon this year.
Commodity markets are volatile, and price can change dramatically. There are no guarantees in projecting forward assigned value for a commodity that is subject to not just supply-and-demand fundamentals and their dislocations, but also to market expectations. And, on the latter, a market view gaining currency suggests that demand for gasoline will improve as the year progresses because of government stimulus action and rising stock market values.
This very well may turn out to be the case, but the viewpoint does run contrary to several known indicators. Firstly, the commercial supply of crude oil in the U.S. is the highest it’s been since 1993, while refiners are operating at a low 81.7% of capacity.
What this tells us is if demand does start to grow quickly, there is a glut of crude supply that can be converted into gasoline, and plenty of cushion in the refinery level to avoid bottlenecks that could cause price pops.
Additionally, preliminary data suggests gasoline demand that was running at a better than 2% annual growth rate at the end of February has reversed, and is slightly below the 2008 period.
Based on history, this makes sense. The unemployment rate increased to 8.5% in March, and job losses continue to mount. The lower rate of those employed mean less commuting to and from work, with the national daily average at 15 miles.
We’re forced to consider lagging indicators as we look ahead, which offers risk to assessments. Here’s another to contemplate. In California, a state hard hit by the recession, gasoline demand was up 5.6% in December compared with November, but down 6.3% from December 2007. January data is not yet available.
Nationally, we saw a similar trend, but less dramatic. When prices fell to five-year lows in December, we saw an increase in demand. However, demand remained down against the year prior until February, and is again slipping.
Could it be that the rising unemployment rate is having an impact on gasoline demand?
Of the 5.1 million jobs lost since the recession started in December 2007, 3.3 million of those job losses occurred since November 2008. Some long-time observers of the gasoline market expect the accumulation of lost jobs will dampen demand, and that lower demand and rising supply will limit an advance in price.
So the question now is will fundamental market analysis prove to be correct, or market expectation? If the latter, the U.S. average could indeed top $2.50 gallon this summer.
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].