By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Retail gasoline prices will gradually move lower across the country through the middle of December after wholesale markets rallied on the first day of the month before easing on limited demand and climbing inventory.
Preliminary industry data for the week of Thanksgiving showed a drop in demand to a three-week low during a time when holiday travel was expected to boost gasoline consumption. Instead, the drop in demand joined by an increase in imports pushed domestic gasoline inventory levels up much higher than expected, widening the year-on-year surplus.
Lower gasoline production failed to stem the increase in gasoline supply.
There are long lag times before absolute consumption data are published, with preliminary statistics on demand estimated through a proxy on how much product was supplied to market. Leading up to Thanksgiving, this data suggested increasing gasoline demand. However, fuel suppliers such as refiners usually position ahead of heavy demand holidays like Thanksgiving by moving additional gasoline “downstream” to ensure there is enough supply to satisfy consumption from holiday travelers.
So, the weekly decline in gasoline demand during the Thanksgiving holiday might have been overstated, just as the preliminary data might have overstated higher demand earlier in November.
Nonetheless, crude oil has been supported near $80 a barrel through much of the fourth quarter on the sentiment that demand was rebounding with a U.S. economic recovery, with the recent data piercing a hole through that premise. Initial data does show gasoline demand up 0.3% in the first 11 months versus the same period in 2008, and 0.7% for November.
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But, the year-on-year comparison is against some of the darkest days of the now ended U.S. economic recession that began December 2007 and concluded this summer, while gasoline demand remains well below 2007 levels.
High unemployment correlates with reduced demand for gasoline.
In the last major macroeconomic report of 2009, the Department of Labor said Dec. 4th that the national unemployment rate dipped to 10% in November from 10.2% in October, while 11,000 lost jobs versus a market consensus calling for about 125,000 job losses.
The report was better-than-expected, suggesting the economy was indeed leaving the recession farther back in the rearview mirror. It also suggests that a rebound in fuel demand might indeed be closer at hand than market bears predict.
Wholesale oil markets initially rallied on the news, however, gains were cut short and reversed by a strengthening U.S. dollar. The jobs report was bullish for the greenback, with the market thinking that the Federal Reserve will start unwinding federal stimulus efforts more quickly than initially expected, including lifting interest rates off of near zero. This would bolster the dollar longer term.
This relates to oil because crude trades internationally in dollars, so a stronger greenback provides more purchasing power from US companies. Additionally, investors have flocked to oil and other commodities as an inflation hedge against a weakening dollar.
Lastly, higher interest rates would diminish borrow-to-trade opportunities, potentially reducing speculation in the market.
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].