By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Wholesale gasoline costs ended February mixed, higher in the West Coast amid seasonal changes in fuel specifications, while other parts of the country mostly saw these costs decreasing. However, the trend moving forward points to climbing gasoline prices at the pump, while the wholesale market is moving higher to start out March.
Gasoline prices almost always increase from early March into mid-May, which is known in the wholesale market as the pre-season rally. Pre-season refers to the period in front of peak demand each year, which is during the summer months when driving reaches an annual high. Market forces gauge existing supply and project forward demand in sizing up how the market’s supply-demand balance will prevail during this peak demand period, which typically pushes prices higher. Primarily, it is that expectation of what might happen that adds a premium in gasoline prices.
There are real costs in transitioning from winter fuels to blends used in the summer, with the summer blends having a more stringent fuel specification that limits the release of harmful emissions into the atmosphere. Emission releases increase during warmer weather, hence the stricter environmental consideration.
The transition costs more to produce each gallon of gasoline by as much as 15 cents. The transition also requires changes to existing inventory, in which winter grade gasoline is pushed into the market to make way for summer blends. The transition in inventory can initially press wholesale costs down as winter grade stock levels are drained. There can also be periods of supply tightness as the market moves to the more stringent gasoline type should enough product not readily be available. This would boost prices.
In ending February, wholesale gasoline costs were initially pressured by concerns over the US economic recovery following a poor reading for consumer confidence and high unemployment. A strike in France at oil refineries was also settled, erasing the prospect for U.S. supply to be shipped to Europe to help meet a resulting shortfall that had pushed prices higher earlier in February. Typically, Europe ships gasoline to the U.S.
Since then, the Commerce Department revised its previous projection for fourth quarter 2009 Gross Domestic Product higher, from 5.7% to 5.9%, while consumer spending in January increased more-than-expected. These reports bolstered the market’s optimism for continued improvement in the US economy, and the view that with a growing economy demand for gasoline would increase, pushing up prices for oil and its byproducts.
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].