Brian L. Milne, Refined Fuels Editor, Telvent DTN
Nationally, the average price for regular grade gasoline spiked to a $2.858 gallon 17-month high on April 12, according to the Energy Information Administration which surveys for this information, and wholesale costs have increased in most of the country’s metropolitan markets since. Those wholesale cost increases will continue to show up in higher retail prices at local gasoline outlets, likely swinging the high even higher.
But, are we reaching a top in this market, which usually continues to climb through late May? The answer is a definite maybe, made more likely by recent events.
Firstly, the ash spewed by Iceland’s volcanic Eyjafjallajokull that has grounded tens of thousands of flights in Europe has dented global demand for crude oil. Some fear too, that the European economy, still fragile from the Great Recession while dealing with debt-laden Greece, could see emerging growth in the EU stunted. Such a scenario sees lower demand for crude oil that would exert downward price pressure in global oil markets.
The latter is the U.S. government’s fraud allegations against Wall Street titan Goldman Sachs, which triggered a global sell-off in stocks and commodities when the lawsuit was made public April 16. Financial dealer Goldman Sachs lost billions of dollars in value that day, while the global market is seen reevaluating its risk appetite, which could mean less speculation in the oil markets.
Some say that it’s no coincidence that the lawsuit comes directly in front of expected proposals for financial reform to be introduced in the U.S. Senate this month that, if passed with current language intact, would reel in trading in derivatives. Derivatives are traded in the oil markets.
Nearing $90 a barrel earlier in the month, many in the market had expected a price pullback, arguing that the rally in oil was running ahead of fundamental factors. These market observers said that the oil market was climbing on expectations for robust growth in fuel demand when data showed a far more sluggish pace in consumption while inventory levels stay stubbornly high. In short, the market rally was deemed driven by speculation on what might happen instead of what was taking place in the underlying physical market.
In light of the Securities and Exchange Commission’s (SEC) civil lawsuit against Goldman, some analysts argue that speculative long positions in the oil market, which is a bet for higher prices in the future, could be ratcheted lower. The thinking goes that it’s better to liquidate some of these long positions before Goldman starts selling out of their trades. This is, of course, speculation as well, and time will be the final arbitrator.
There is a near consistent history for gasoline prices to climb from early March through late May, and so far this is what has taken place. For retail, the U.S. average price for regular grade gasoline increased 15.6 cents, or 5.8%, from March 1 through April 12, when the latest high was reached. In the wholesale financial market, gasoline values surged 19.5 cents or 9% through April 5 when they reached an 18-month high, giving back 7 cents of this advance as of April 16.
View DTN’s Weekly and Historical Gas Prices.
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].