By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Wholesale gasoline prices moved higher in metropolitan markets across the U.S., which will reverse the trend in retail prices since the middle of May from down to up. Broad-based economic data underpinned the higher wholesale prices, which continue to climb during the first day of summer.
A weakening U.S. dollar that had reached a four-year high against the euro in early June was a key catalyst in reversing the short-term downtrend in gasoline prices. The reason is because crude oil trades internationally in the U.S. dollar, so a weaker greenback means more are needed by US companies to procure the same amount of barrels. The greenback continues to be under pressure following news that China will let the yuan float against other currencies, which is expected to increase the value of the yuan.
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The move by China is seen bolstering U.S. industries because it would make US exports more competitive internationally. Major U.S. stock indices rallied on the news.
Many in the market characterize the mid-June upturn in wholesale prices as dubious, pointing to stubbornly high inventory levels of oil and gasoline while demand remains limited by high unemployment. The Department of Labor said the jobless rate was 9.7% in May, while an increasing number of Americans have dropped out of the labor force altogether, which cuts down on commuting.
The American Petroleum Institute, a Washington, D.C.-based industry group for oil and gas, released data on June 18 showing that gasoline demand in the U.S. for May was at the lowest consumption rate for a May since 2003. They linked the lower demand figure to high retail prices.
“This downward movement compared with year-on-year increases for both March 2010 and April 2010 indicates that gasoline demand is more sensitive to higher prices and to the effects of the sluggish economic recovery than distillate and jet fuels, which both saw increased demand in May, compared with previous months,” said API Chief Economist John Felmy.
Historically, high unemployment and high retail prices have dampened demand for gasoline.
While fundamental factors; supply and demand, remain bearish, the market bias remains to the upside on expectations that the ongoing economic recovery will spark increased demand for energy. Global demand for oil is increasing, which is pushing prices for longer-term contracts higher. This dynamic, which is filtering into near-term pricing, is made more acute by the oil spill in the Gulf of Mexico.
A current six-month moratorium on deepwater drilling invoked by the Obama administration on May 27 has sparked concern of a permanent ban, which would limit the amount of oil the US would be able to produce, requiring greater amounts of imports. Already, the oil spill has triggered increased regulations, with more expected that will increase the cost to drill that will be embedded in fuel prices.
Even before the oil spill, there was a trend underway in which more oil was being held in inventory on expectations that increasing demand would challenge existing supply. Holders of this inventory can profit in the futures market in the meantime, and wait for demand and prices to increase before selling into the market. As a result, high inventory levels are having a diminished impact on oil and gasoline 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].