Brian L. Milne, Refined Fuels Editor, Telvent DTN
Retail gasoline prices in major metropolitan markets across the U.S. continued their upside trajectory through the middle of August, responding to higher costs passed through from the wholesale markets, with pump prices near the 2009 high reached in late June.
The U.S. average for regular grade gasoline surged to $2.647 gallon on Aug. 10, which is just below the 2009 high set June 22 at $2.690 gallon.
View DTN’s Weekly and Historical Gas Prices.
After reaching the high in late June, the U.S. average had tumbled 20 cents on a sharp decline in crude oil prices. However, the rally reasserted itself, with the upside reversal sparked by optimism that the economy was poised to escape recession that would, in turn, trigger greater demand for crude oil and its byproducts such as gasoline. That view is now dimming, as a growing number of market followers believe the subsequent recovery will be anemic.
Many oil veterans had warned that crude oil, gasoline and diesel fuel prices were climbing too high too quickly when considering bulging commercial supplies and lackluster demand. They suggested that using the stock market to gauge oil demand was flawed, while many have been calling for a steep downside decline in oil prices.
Halting the rally midway through August was, in part, weaker-than-expected consumer confidence, with recent data showing that consumers are embracing their new found reverence towards frugality.
This put the brakes on a surging stock market. Consumer spending accounts for roughly 70% of U.S. Gross Domestic Product, so if consumers are reticent to spend, analysts note that the much anticipated recovery will be weak.
And this sentiment was voiced many times over earlier in the year as analysts warned that rising unemployment would spark conservation by the American consumer, even by the employed out of their fear they too could find themselves in the ranks of the jobless. Climbing unemployment historically has correlated with lower gasoline demand, which is what we have seen.
Moreover, the mid-summer run-up in retail gasoline prices appear to have cut short what looked to be a recovery in demand earlier in the summer, as consumers quickly trimmed their driving as a result. Preliminary data shows that, year-to-date gasoline demand is down 1% against 2008, while recent demand is flat with the year-ago period. It’s worth highlighting that gasoline demand was down 3.5% in 2008 compared with 2007, as consumers had cut driving in the face of all-time high prices and recession.
Another important factor that has been driving oil prices has been the U.S. dollar. Commodities trade internationally in the U.S. dollar, so its value against world currencies has a direct impact on oil prices. Additionally, the U.S. dollar serves as an indicator of inflation.
In early August, the U.S. dollar had fallen to multi-monthly lows against the Euro that triggered a rally in oil prices. Since then the U.S. dollar has strengthened, pressuring oil prices. Additionally, the strengthening of the U.S. dollar suggests inflation will be kept at bay in the near-term; some say until 2011.
This event too has prompted traders that had positioned themselves against inflation by acquiring crude oil and other commodities to unwind these hedges since inflationary fears have moved well out on the calendar.
These events are putting pressure on wholesale gasoline costs, which posted steep declines midway through August. However, consumers may need to wait a bit longer to find relief at the pumps from falling wholesale prices, as higher pass through costs from earlier in the month and in late July continue to work their way through the supply chain to the pumps in your local neighborhood.
About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent 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].