Brian L. Milne, Refined Fuels Editor, Telvent DTN
American motorists should expect little fluctuation in gasoline prices this week across most of the country after pump prices slipped in early November, with the bias to the downside. There are a number of exceptions, with retail prices in the Midwest seen halting their slide and edging slightly higher after a big decline earlier in the month.
Wholesale costs for gasoline were down across most metropolitan markets of the U.S. during the second week of November, pressured late last week by the market’s concern over flagging demand and a growing supply surplus. Those worries triggered a two-day sell-off, and are reflected in a drop in gasoline wholesale costs for many markets.
However, two factors auger for a watered down impact of lower wholesale costs on pump prices. Firstly, the market is starting the second half of November with a rally on a weakening U.S. dollar and a surging stock market. Second, the industry will be active in moving supply downstream ahead of heavy demand during the Thanksgiving holiday.
The strength or weakness of the U.S. dollar has had a profound impact on crude oil and, as a result, gasoline prices for more than two years. The dollar-crude relationship helped spark crude oil’s burst above $100 barrel in 2008, and is again underpinning higher prices since crude trades internationally in the greenback. A weaker U.S. dollar means more are needed for the same barrel of crude, while also making it cheaper for foreign buyers of oil.
“You could say oil is about $20 to $25 a barrel higher simply because it’s priced in dollars and there’s a weak dollar,” ExxonMobil Corp. Chief Executive Rex Tillerson said last week, saying crude would likely be near $55 barrel if the U.S. dollar hadn’t depreciated against the euro during the past 18 months. Instead it’s near $80 barrel.
The latest weakness in the U.S. dollar came with President Barack Obama’s trip to Asia where he sought a change in China’s monetary policy. Instead, he drew a tongue lashing by China’s banking regulators who called U.S. dollar policy reckless, with the market reacting by selling the greenback.
Greater-than-expected growth by Japan for the third quarter also triggered a rally in equities. The oil market has been looking to the stock market for clues on future demand, and sees the rise in equities as a sign that the economy continues to recover from the worst economic contraction in decades.
So, as the market claws back, it mitigates the benefit from the decline in wholesale costs. The upturn is also coming as the market prepares for the four-day Thanksgiving holiday weekend by bulking up inventory near the end of the supply chain. This activity should trigger a quick pop in demand that will support gasoline prices over the coming week to two weeks.
The U.S. government said recently that it expects the U.S. average for regular grade gasoline to average $2.66 a gallon for the fourth quarter and $2.36 for all of 2009. The trend for higher retail gasoline prices continues into 2010, with the forecast calling for a U.S. average at $2.81 gallon.
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].