By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Preliminary federal data shows gasoline demand down 0.5 percent through the four-week period ended Nov. 26, but gasoline prices continued to move higher. Based on the sharp gains, with several cities seeing their wholesale prices up by more than 10 cents from the previous week, the US gasoline retail average could post a better than two-year high when the weekly report is released Monday (12/6).
Several factors conspired to vault gasoline prices to May highs, and potentially to their highest value since October 2008, when the market was crumbling amid the early days of the financial crisis. In fact, retail prices in several markets-California, Washington and New York-have topped $3 gallon. More markets are seen eclipsing the psychological $3 gallon price barrier this month.
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Historical correlations show that high retail prices depress the gasoline consumption rate, with high pump costs triggering conservation. So too, does a high U.S. unemployment rate, which increased to 9.8 percent in November according to the Department of Labor.
From Jan. 1 through Nov. 26, the Energy Information Administration, a division with the Department of Energy, shows a modest 0.3 percent year-on-year growth rate in the gasoline consumption rate. So what’s driving the higher prices?
Lower than usual gasoline supply in the Northeast since earlier in the fourth quarter has been one catalyst for the rally in prices across the country owing to its location. Wholesale spot gasoline prices trade in what’s known as a cash differential to the New York Mercantile Exchange RBOB (reformulated blendstock for oxygenate blending) futures contract. While the vast majority of these contracts are settled financially, the underlying delivery location is the New York Harbor. So, the shortages in the Northeast are having an outsized impact on the contract, supporting higher prices.
The key driver for higher gasoline prices has been, however, signs that the U.S. economy was continuing its road to recovery. Data on manufacturing, retail, the service sector to consumer confidence have all been better than expected, prompting bullishness in the oil patch. An expanding economy uses more energy. The Dec. 3 unemployment report for November was a fly in the ointment for these market bulls, but prices continue to move higher.
The U.S. retail gasoline average for regular grade averaged $2.846 per gallon for the week-ended Nov. 29, according to the EIA. Look for the weekly average to challenge the May 10 high of $2.905 gallon. Should the average top the current 2010 high, the next highs on the chart are $2.914 gallon on Oct. 20, 2008 and $3.151 gallon on Oct.13, 2008.
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]