Brian L. Milne, Refined Fuels Editor, Telvent DTN
The price strut higher in wholesale gasoline costs stalled midway through March, slowing the advance in retail prices that have surged to fresh highs earlier this month. Weekly price data from the federal government’s Energy Information Administration showed a US retail average for regular grade at $2.751 gallon as of March 8, matching the 15-month high reached January 11.
A host of factors have converged to push up wholesale gasoline costs, including renewed bullish sentiment for sustained economic recovery bolstered by better-than-expected data on unemployment for February. Key price forecasting groups also revised higher projected global demand for oil in 2010 on an improving outlook for the world economy. Chief among the reasons pushing gasoline prices higher is the ongoing transition from winter-grade gasoline to summer-grade, with the latter more expensive to produce because of tighter environmentally dictated fuel specifications, and seasonal factors.
With near absolute consistency over previous years, wholesale gasoline costs climb from early March through late May bolstered by the fuel spec transition and the anticipation for increasing demand in the spring and summer as the weather improves. This well known seasonal price increase is further accelerated by speculation, with speculators buying futures contracts in expectations for gasoline prices to increase that, in turn, lifts gasoline prices.
Expect More Increases
Retail gasoline prices could move higher by another 25 cents gallon by the end of May, which would push the U.S. average to $3 gallon. The EIA said in its recent outlook that it is very likely that retail gasoline prices could push over the $3 gallon price point in the spring and summer, with prices already topping $3 gallon in California.
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Yet demand, despite improving, remains lackluster. Moreover, expectations for this year and 2011 suggest projected moderate growth in personal income combined with climbing gasoline prices will limit the gasoline consumption rate. For evidence, the EIA notes that in 2008, when gasoline prices raced up to all-time highs, gasoline demand fell while public transportation usage increased 4%. In 2009, when prices tumbled, public transportation use fell 3.8%, demonstrating linkage between prices and consumer behavior.
Time will tell on what course the economy and gasoline prices will take in the coming weeks and months ahead. An increase in consumer spending in February, occurring despite widespread snowstorms during the month that was seen depressing this spending does bode well for economic growth. Climbing consumer spending also lead economic recovery in the latter stages of the 1981-1982 recession/recovery period. So, gasoline prices might still continue higher even if gasoline demand fails to keep pace.
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].