By Brian L. Milne, Refined Fuels Editor, Telvent DTN
The U.S. average for all formulations of regular grade gasoline surged nearly a nickel to $2.783 gallon as of Aug. 9, according to the Energy Information Administration, the statistical arm of the Department of Energy. The price jump in retail was somewhat delayed from higher wholesale costs in late July, early August, with the Aug. 9 U.S. average the highest since late May when it was sliding from an 18-month posted at $2.905 gallon.
Another reversal is at hand however, with wholesale prices tumbling during the second full week of August, as pessimism over the U.S. economy again heightened. Wholesale gasoline prices posted double-digit declines in metropolitan markets along the Atlantic Ocean and Gulf of Mexico and in the Midwest, with smaller decreases occurring in the Rocky Mountains and in the West Coast.
The decline in wholesale costs will gradually work its way to retail pricing, but this pass through will be slow to materialize. In other words, retail gasoline prices are unlikely to decline 10cts or more over the next couple of weeks despite this tumble in the wholesale market.
View DTN’s Weekly and Historical Gasoline Price Index.
The EIA offered its Short-term Energy Outlook on Aug. 10, projecting an average retail gasoline price of $2.80 gallon for the summer months, which they define as being from April 1 through Sept. 30. For all of 2010, the Beltway analysts project a $2.77 gallon retail gasoline price average, with these two projections unchanged from their expectations in July. The price projections are down from their April outlook however, with the summer average 12 cents lower from their April forecast.
The current outlook suggests that we should, overall, see limited price changes at the pump through the balance of 2010. However, it also illustrates the high degree of uncertainty in forward price forecasts.
To this point, fundamental factors such as supply and demand along with seasonal features would guide oil and gasoline price forecasters. However, that dynamic has been relegated to a part-time indicator of forward pricing. Instead, speculation on the broader economy’s recovery has been the key ingredient in determining short-term price changes, while adding volatility. Instead of focusing on inventory builds or draw downs for instance, oil traders are watching the equities and currency markets for their indicators when entering into a trade.
Following these vagaries is no easy task, while providing limited visibility on price expectations looking forward.
The recent sell-off in New York Mercantile Exchange oil futures was triggered by a sell-off in equities on comments from the Federal Reserve that the US economic recovery had slowed. This worry reignited talk of a double-dip recession, sending investors fleeing risky investments such as stocks and commodities to safe-haven investments such as treasuries. It also reversed a slide by the U.S. dollar that had slumped to a 3-1/2 month low against the euro earlier this month, further pressuring oil prices.
The driving season is nearing an end as we march towards Labor Day, which will reduce demand for gasoline while typically pressuring gasoline values. This expectation duels with an outlook for a very active hurricane season which peaks in late August through September. Looking past these two realities, to gauge the short-term direction of gasoline prices, look to the stock market. We should see a divorce in this marriage of convenience sometime in the future, but that day is not now.
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].