Brian L. Milne, Refined Fuels Editor for Telvent DTN
Most drivers filling up with gasoline in the country’s major metropolitan markets following the Labor Day holiday will discover a modest decline in pump prices at their local stations induced by a decrease in wholesale costs leading up to summer’s final holiday.
However, lower wholesale costs were mitigated in late week trading ahead of the Labor Day weekend, with some degree of supply tightness lingering in the New York market and mounting in Chicago. Meanwhile, unexpected refinery downtime in California in August spilled into September to bolster wholesale gasoline costs along the West Coast.
Active trading in New York Harbor’s wholesale market ahead of Labor Day was symptomatic of the need for more gasoline following a shortage of feedstock material since August, with the supply tightness working itself out. Supply tightness in the Chicago market was also seen cutting into the potential for even lower prices as far away as Texas and Oklahoma, with the regions linked by way of pipelines.
Higher prices in Chicago were luring barrels of gasoline from the producer region in the Gulf Coast, while also cutting into the amount of supply being shipped west of Chicago. As a result, wholesale prices began trimming losses in markets as far west as Oklahoma, which will continue until supply tightness in Chicago eases.
If you’re filling up your automobile or operating stations in Los Angeles, expect a big jump at the pump. Production outages at two refineries in Martinez, Calif. in August limited gasoline output in the state to push wholesale prices higher.
The Martinez refineries are located near San Francisco, with the Bay area encountering sharply higher wholesale gasoline costs and, subsequently, a hike in the region’s retail prices in late August. The lower production reached south to L.A. in the week leading up to the Labor Day weekend, with the anticipated delay in returning one of the production units in Martinez triggering a spike in wholesale gasoline costs in early September.
As a result, L.A. gasoline prices narrowed their discount to the climbing costs in the Bay. Additionally, since California ships gasoline to other states, prices in Las Vegas were bumped higher, with gasoline also costing more in the Pacific Northwest.
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Longer term, gasoline prices typically decline after the Labor Day holiday because demand is lower. Producing gasoline is also less costly because the industry begins transitioning to manufacturing winter-grade gasoline, with emission releases less of a worry when ambient temperatures are lower. A national unemployment rate of 9.7% is another factor seen denting demand and limiting gasoline prices near-term.
However, a weaker U.S. dollar would support higher prices because crude oil trades internationally in the greenback which makes it cheaper for foreign buyers.
A weaker U.S. dollar also lures investors into commodities as a hedge against inflation. Following the Labor Day holiday, the U.S. dollar fell to a one-year low which pushed crude oil back above $70 per barrel. Crude oil is gasoline’s largest cost component.
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]