By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Retail prices across the country are positioned to move higher in early May, which is typical this time of year as the market prepares for increased driving demand during the warmer months in late spring and summer. Climbing retail prices follows a renewed push higher in the gasoline wholesale market, with a number of metropolitan markets in the Midwest and East Coast seeing big increases following April.
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After a roughly nickel increase through the end of April, c-store retailers can expect another 10-15-cent increase at the pumps by the Memorial Day weekend.
While historically gasoline prices do increase this time of year, the higher prices are shrugging off ample supply levels.
“In short, the spring U.S. gasoline market is characterized by modest consumption, increased ethanol use, high availability of imports, and high gasoline inventories U.S refineries should be able to meet supply needs through June, with only a minimal potential for significant price impacts due to planned outages,” wrote analysts with the Energy Information Administration (EIA) in a weekly report released on April 28.
In the past, notably during 2007, gasoline prices had spiked during refinery outages, both planned and unplanned.
However, federal mandates are requiring progressively higher levels of ethanol to be blended into gasoline, usually at a 10% ratio to 90% gasoline, which reduces the amount of gasoline required to be produced by oil refineries to meet demand. The increased supply through ethanol has provided a greater cushion in refining capacity, diminishing the likelihood for a product short market that, in turn, would drive gasoline prices higher.
Instead, retail gasoline prices are being pushed higher by the financial gasoline market, which trades in futures that are used as the benchmark index for the underlying wholesale physical market. A bullish market sentiment continues to push futures values higher.
Underpinning the market’s bullish psychology is the recovering US economy, which grew at a 3.2% annualized rate during the first quarter according to an initial government estimate. The growth rate follows a 5.6% expansion during the fourth quarter 2009.
The GDP growth in the first quarter was primarily driven by increased consumer spending, while personal consumption spending increased for the fifth straight month in March. The oil markets saw this news further supporting the upside in prices, suggesting the US economy is on a better footing. A decline in those seeking unemployment benefits and an increase in manufacturing activity also supported the bullish sentiment.
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].