By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Retail gasoline prices will continue to march higher into November across the U.S., with wholesale costs for gasoline being pulled up by climbing crude oil values. In fact, crude oil prices in the U.S. have topped $80 barrel, and now analysts are pointing to $100 barrel crude oil by year’s end.
Since crude oil accounts for about 65% of the cost of gasoline-it averaged 64 percent nationally in September, a rally in crude oil prices will reverberate in higher gasoline prices. And that’s what’s taking place now.
Nationally, there’s a surplus of crude oil, diesel fuel and gasoline supply. Additionally, gasoline prices typically dip following the summer driving season before again advancing during holiday travel in November. As such, it’s difficult to understand why gasoline prices are climbing now.
Macroeconomics, which refers to broad-based influences on the economy, has underpinned crude oil and gasoline prices since spring. So, the factors that typically dictate fuel prices, supply and demand, have become subordinate to broader issues, such as the climbing stock market. In other words, optimism on what might occur, such as economic growth and, in turn, higher demand for fuel, is having a greater impact on pricing than what’s currently held in inventory.
Through October, the U.S. dollar has been battered, falling to a 14-month low. Some say, with the federal deficit climbing, the greenback will continue to weaken. A weaker U.S. dollar drives the cost of crude oil higher because crude trades internationally in the currency. So, more dollars are needed to purchase a barrel of crude oil when the dollar has less value.
The weakening dollar has supported higher prices for all commodities, including coffee, cocoa and soybeans. These commodities are seen holding value even if the dollar isn’t, so they cost more when the greenback weakens. Investors will also shift funds from the U.S. dollar into commodities to guard against value loss, i.e., inflation, for instance. This exercise can and has exacerbated the price increase in commodities.
Now, with crude oil in an uptrend since cracking above $75 and now $80 barrel, reaching an $82 barrel high, some in the industry are pointing to a return of $100 bbl crude oil. As we sit now, we are likely looking to at least a crude price increase to about $90 bbl before year end.
View DTN’s Weekly and Historical Gas Prices.
Each $1 barrel increase in crude prices equates to a 2.4 cents per gallon increase in gasoline prices. So, if $90 a barrel crude is reached, we should expect a nearly 20 cents increase in gasoline prices from where we are at now. The price increase more than doubles if we hit $100 barrel.
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].