By Brian L. Milne, Refined Fuels Editor for DTN
After nearly two months of gasoline price increases just about every day, wholesale costs moved lower last week, offering a break in the rapid ascent by pump prices for consumers. Most parts of the country saw a double-digit decline in wholesale gasoline costs in the week leading up to the start of summer, which will freeze or pressure retail selling prices for gasoline in the coming week.
Lower wholesale costs were caused by a strengthening US dollar against world currencies in mid to late June, while expectations for a quick recovery for the economy dimmed. These two features, which have little to do with traditional supply-demand indicators, have been the primary price driver for crude oil and, in turn, gasoline through the second quarter.
Crude oil trades internationally in US dollar denominations, so a weaker dollar pushes up crude prices. Meanwhile, the fuels market has been looking to the stock market for clues on when the US economy will jettison itself from the worst recession in decades, with the belief that once the economic malaise ends, demand for crude and fuels will rebound.
Recent data has made many investors a bit more cautious that indeed the economy is poised for quick growth in the near-term however, dialing down the influx of speculative-driven funds into the oil sector for the moment.
Supply Strong
When looking at supply, gasoline inventories increased nationally in mid-June despite a restricted production rate by US refiners as imports surged. This was a shot across the bow for market bulls that have been looking at the recent increase in demand triggered by a hike in driving during the summer months as a precursor to a tightening supply-demand balance.
A tighter balance drives prices higher. However, higher prices also lure supply to the US from foreign suppliers while prompting domestic oil refiners to increase their production rate to capture better margins. Building inventories suggest demand is less robust than speculated.
Wholesale costs are also sliding in the upper Midwest because of both the pressure from slipping national values and an improving supply picture for the region. Pipeline deliveries from the Gulf Coast have brought much needed gasoline supply to the region that have brought down wholesale costs.
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The hiked up deliveries to the region appear to have averted a potential tight supply-demand situation for the region that could have endured beyond July.
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].
