By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Most wholesale gasoline costs countrywide are moving lower as we march toward the end of the third quarter, with the current decline consistent with its historical pattern of falling prices as demand eases from the summer peak and production costs decrease with the transition to winter-grade formulas. This will gradually press retail prices lower, as the reduction in costs move through the supply chain.
The average price for all formulations of regular grade gasoline for the United States last reported by the Energy Information Administration (EIA) for the week-ended Sept. 12 fell 1.3 cents to $3.661 gallon. The decline in street prices have been too slow for many observers, who cite weak demand and greater declines in the price of U.S. crude represented by the market value of West Texas Intermediate.
EIA data shows that refiners have increased the margin they’re drawing on through gasoline production from 34 cents gallon in 2010 to 50 cents gallon this year. As scandalous as that might sound, consider the billions in investment that oil refiners have put into their operations in recent years due to more stringent environmental regulations.
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However, there are other considerations as well, including supply chain economics for gasoline. It takes two weeks for 50% of the cost change in spot market pricing to reach the retail outlet and four weeks for 80% of that cost change to be reflected at the pump. Roughly eight weeks will transpire before the full cost is reflected, and those prices will move up and down throughout the time period, further impacting the pass through costs.
In looking at futures trading, with these contracts used as the transparent price benchmark in setting physical spot prices, we see enormous volatility. Hurricane Irene had a major impact on the supply chain in the New York Harbor, where the futures contracts that are indexed against in setting the price for gasoline and diesel, albeit most operations were quickly restored. Still, these disruptions pushed up the gasoline futures contract that trades on the New York Mercantile Exchange and called RBOB (Reformulated Blendstock for Oxygenate Blending.)
NYMEX RBOB futures September delivery contract surged to a $3.0573 gallon one-month high on Aug. 31 on its last day of trading amid the Hurricane Irene caused supply disruptions. On Sept. 14, it fell to a $2.6844 gallon one-month low, marking a 37.29 cents or 12.2% decline from absolute high to absolute low for the two-week period. Based on what we know about the pass through costs, retail prices are still being impacted by the hurricane-related disruptions, slowing the decline in retail prices.
In turning to crude, some business and mainstream media outlets have been pointing to a steeper decline in the US crude benchmark, the WTI contract that also trades on NYMEX and has its delivery location at the Cushing supply hub in Oklahoma. Earlier this year, a pipeline phase was completed that sharply increased the supply of Canadian crude oil flow to Cushing, while the Oklahoma hub currently lacks pipeline capacity in moving the supply out, creating a surplus for the region.
The WTI crude price is now trading at steep discounts to other crude grades, including those used by US refiners outside the Midwest. In contrast to the rising supply at Cushing, the European benchmark crude, Brent crude which trades on ICE Futures, has been negatively impacted by prolonged production problems in the North Sea, supply disruptions from Nigeria, and of course, the lost output from Libya, another OPEC member, due to civil war. All of this has kept the Brent crude price at a more than $20 barrel premium to WTI, which was more than $25 barrel in recent trading.
U.S. retail gasoline prices will continue to move lower through September and October as the declining wholesale costs pass through the supply chain, while demand is just dreadful amid high unemployment and what Americans see as a still costly fuel at the pump.
“As the summer driving season came to a close marked by the Labor Day weekend, we continue to observe noticeable year-over-year declines [in gasoline demand],” said John Gamel, director of economic analysis for MasterCard advisors, the professional arm of MasterCard Worldwide that produces a weekly report, SpendingPulse, on gasoline consumption and pricing.
While noting a host of issues impacting US consumers, including wildfires in Texas, Hurricane Irene and Tropical Storm Lee that have disrupted normal pumping patterns, he said that the main culprit to dismal gasoline demand this year, especially over the summer, has been the 36% increase in gasoline prices from 2010. Gamel said this has led to consumers and businesses finding ways to reduce their gasoline consumption, including driving more fuel efficient vehicles, driving more fuel efficiently by driving slower and maintaining their vehicles and by limiting and combining discretionary driving trips.
“In addition uncertain economic conditions and a consistently weak labor market have continued to weaken U.S. gasoline consumption compared to pre-recession levels,” said Gamel.
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 15 years as an analyst, journalist and editor. He can be reached at [email protected].