By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Retail gasoline prices in major metropolitan markets nationwide have surged in October, climbing nearly 20cts per gallon to average nationally at a $2.674 gallon four-month high. The previous high was reached in late June at $2.691 gallon.
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The price march higher in October, while broad-based, was uneven. Gasoline prices increased more in the Midwest during October than along the West Coast for instance. Still, gasoline prices are averaging the most along the West Coast and the least in states in the south along the Gulf of Mexico.
Early in the fourth quarter, refinery downtime for scheduled maintenance is a regular seasonal occurrence. Refiners plan ahead of these outages by building up supply levels, but supply tightness can occur nonetheless. Yet, this is not the factor that drove up wholesale costs for gasoline in October, even though refiners’ output is hovering just above six-month lows.
Instead, the two biggest influences on gasoline prices in October was weakness in the U.S. dollar and signs of economic growth.
In fact, the U.S. Commerce Department reported in late October that U.S. Gross Domestic Product jumped 3.5% during the third quarter after declining 0.7% during the second quarter. That data means the U.S. escaped recession during the summer, and is again on a path of expansion. A growing economy uses more energy, and the market reacted to the GDP number by rallying crude oil nearly $2.50 barrel that day.
A weakening U.S. dollar suggests inflation, which makes commodities from energy to food more expensive. This situation is especially relevant for crude oil, which trades in an extremely large world market with many buyers and sellers. A weaker greenback means U.S. buyers will need more of them to acquire crude oil when compared with those using Euros for example.
These two macroeconomic factors have influenced oil prices since the spring, and will continue to do so in the final weeks of 2009. In fact, we could very well see oil prices at $90 barrel before year-end, which could add another 20cts to 25cts to gasoline prices on average.
October is an interesting month for oil prices historically however, with prices frequently peaking during the month. It’s quite possible that the price highs were reached last month, and prices will start to ease gradually through November.
Considering surplus levels of crude oil, gasoline and diesel, gasoline prices could move lower. Additionally, the U.S. dollar has bounced off a 14-month low, and could have installed a short-term bottom, which would short-circuit advancing crude prices based solely on the greenback. And then there’s the economy, with the national unemployment rate last tallied in September at 9.8 percent.
As robust as a 3.5% quarterly jump in GDP is, a jobless recovery does not bode well for gasoline demand, and lower gasoline demand will pressure prices. An unemployment rate moving over 10 percent would deal a psychological blow to those in the market expecting prices to continue higher, prompting them to reverse from buyers to sellers.
For this week, look for retail prices to hold steady, with some regions looking for modestly lower pump prices. Despite lower wholesale costs across most of the country during the final week of October, a portion of rising costs from earlier in October are still working their way through the supply chain to consumers.
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].