By Brian L. Milne, Refined Fuels Editor, Telvent DTN

The first week in February saw the most price volatility in the wholesale gasoline market since late September 2009 when crude oil started its march higher into October and pulled fuel prices up too, with wild price swings triggered during periods of market uncertainty.

Interestingly though, despite trading in a 22.5 cents gallon range on the week, the financially traded gasoline market only declined 1.67 cents.

The markets reached a crossroads in January that is now playing out in February. Fundamental factors impacting the oil and gasoline markets, which refer to supply and demand issues are weak, and have been for a long time.

To quickly sum up the market’s disposition, there’s more than enough supply to address demand while consumption remains poor. In an effort to balance the lopsided factors, oil refiners have cut their production rate to levels not seen in decades. In fact, U.S. oil refiners are doing terrible now, posting hefty losses in the fourth quarter of 2009.

In exiting recession midway through 2009, a majority in the market saw U.S. economic expansion and with it, increased demand for fuel. So, as signs emerged that the economy was growing, such as the 5.7% jump in real U.S. Gross Domestic Product in the fourth quarter, fuel demand would surely follow.

This hasn’t been the case, with preliminary data showing gasoline demand down 0.5% in January compared with January 2009 when we were in recession. The oil market has turned its attention to weak demand, and that has triggered several sharp one-day declines, including a nearly 6.5 cents loss in the financial gasoline contract on Feb. 5.

Market Forces

Macroeconomics continues to have a very large impact on the oil markets, but this data has been mixed. While better-than-expected data on GDP, manufacturing, consumer spending and home sales all bode well for a U.S. expansion, credit fears from European nations and China’s clampdown on borrowing that was seen as a growth engine for oil demand and an enduring high U.S. unemployment rate have sent shockwaves into the market.

The rush of investment dollars that flowed into oil and gasoline at the start of 2010 are now being pulled out and redirected toward safe haven investments such as, yes, the U.S. dollar.

The greenback rallied to a seven-month high against the euro on Feb. 5, or was it the euro falling to a seventh-month low, as credit issues highlighted by Greece make the U.S. market far more attractive for investors.

View DTN’s Weekly and Historical Gas Prices.

The U.S. dollar factors into oil prices because it’s the currency used internationally in oil transactions. The sudden strength in the U.S. dollar pressured commodity prices in the U.S. lower.

The financially traded gasoline market has posted its fourth consecutive weekly decline in early February, slumping to a six-week low on Feb. 5. This decrease will gradually work its way through the supply chain, offering consumers lower prices at the pump.

Longer-term, the battle between market realities and expectations muddies the price forecast, but the historical trend is for gasoline prices to increase from January into April, although they frequently point lower in February.

 

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 more than 14 years as an analyst, journalist and editor. He can be reached at [email protected].