By Brian L. Milne, Refined Fuels Editor, Telvent DTN
After slumping to a 10-week low of $2.704 gallon on Aug. 23, the US average price for regular grade gasoline, all formulations, is poised to move higher in front of the Labor Day holiday weekend.
Labor Day marks the end of the summer driving season, with gasoline demand higher during the summer months as families take vacations. This year AAA projects a 9.9% increase in travel for the Labor Day weekend compared with the same holiday weekend in 2009, with 34.4 million Americans expected to travel from Sept. 2 through Sept. 6. AAA said 31.4 million people, or 91% of all travelers, are planning a road trip, an increase of 10.3% from last Labor Day when 28.5 million travelers went by motor vehicle.
Wholesale gasoline prices that had slumped midway to late August have since reversed higher despite the seasonal tendency for a downturn in gasoline costs from August to September, pressured by sharply lower demand in September. In fact, the Department of Transportation shows that Vehicle Miles Traveled consistently decline in September from August, offering testimony to the stronger seasonal demand during the summer months.
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The late season push higher in wholesale gasoline prices comes with higher futures values, with the gasoline benchmark contract tumbling to a nine-month low on Aug. 25 before reversing on a combination of technical trading and supportive comments from Federal Reserve Chairman Ben Bernanke. In an annual statement from Jackson Hole, Wyo., the Fed chairman said the economy remains on track to grow despite the slowdown seen over the summer, while the central bank was prepared to introduce additional stimulus should the U.S. economy slow to a point that threatens the recovery.
Financially traded oil futures, which are used to hedge physical positions in the market as well as speculate on the price of oil and its byproducts, surged on the news, while the U.S. dollar slumped against other currencies.
Logistical activity in the physical market is also underpinning upside price support for gasoline. Cash differentials, which refer to the price difference between physically traded gasoline in the spot market and the benchmark futures contracts, have strengthened sharply in late August in markets east of the Rockies.
Fuel specifications for gasoline ease from summer to winter blends because lower ambient temperatures reduce the emissions release of harmful volatile organic compounds. It is cheaper to make winter-grade gasoline than the summer blends because of this reality. However, transitional periods from one blend to the next can bolster wholesale gasoline prices, and that’s what’s taking place now.
Refiners have been running lean gasoline inventories through late August ahead of this change in Reid Vapor Pressure requirements, which is the measuring system in gauging emission release, to ease the transition from summer to winter blends. In short, they are clearing out tanks for the higher RVP winter grades, not wanting to get caught with the more costly to produce summer blends. This is creating supply tightness along the supply chain, bumping up wholesale costs that will be passed through to retailers.
Nationally, retail prices should move higher in markets east of the Rockies ahead of the Labor Day weekend. In contrast, Californians should expect to see flat to lower retail prices this week since the state works with a different RVP calendar; however, an increase in benchmark futures values could short-circuit this projection.
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].