By Brian Milne, Energy Editor for Schneider Electric.
Futures prices for gasoline are down a sharp 7% from their mid-month high during early trading for the final week of June, pressured by concern over the effect on demand when government stimulus efforts conclude, which in turn spurred strength for the U.S. dollar.
The nearest delivered RBOB (Reformulated Blendstock for Oxygenate Blending) futures contract trading on the New York Mercantile Exchange plunged 20cts from a June 14 $2.9193 gallon high to $2.7160 gallon in morning trading June 24, with technical support found at the $2.6879 gallon May 1 low.
The selloff comes on concern over forward demand for oil amid a freeze in interbank lending in China, the world’s second largest economy and consumer of oil, as its central government declined to intervene with cheap loans as it has in the past. China is paring back its involvement in banks, analysts indicate, out of concern the economy would overheat, pushing up inflation.
Beijing has aggressively taken steps to support economic growth for China over the past few years through easy money lending, among other efforts, repeatedly notching double-digit growth in China’s gross domestic product through 2011. GDP growth slowed to 7.8% in 2012, and is seen matching that expansion rate this year, while recent data shows the country’s manufacturing sector contracted in May.
Oil demand is linked to economic growth, with China’s recent expansion the leading catalyst in driving an increase in global oil consumption over the past few years.
The market is also worried over the potential for already sluggish gasoline consumption in the United States, the world’s largest economy and consumer of oil, to slow further once central bank stimulus efforts are taken away.
Federal Reserve Chairman Ben Bernanke, during his June 19 press conference following the two-day Open Market Committee meeting, gave the clearest signal to date that the central bank could begin paring back an asset bond buying program later this year, with those comments prompting a steep selloff in equities and commodities. Bernanke noted certain economic conditions would need to exist before the Fed would curb its $85 billion a month bond buying program, but said the US economic recovery was closing in on those goals. Bernanke also noted that it could restart the bond buying program if it did remove the stimulus and the economy again slowed to a point of worry by the Fed.
Wholesale gasoline costs were down in most major metropolitan markets across the country during the third week of June despite the oncoming Independence Day holiday—the busiest travel period for the summer.
Retailers should take note of less fuel demand for the July 4 holiday this year than in 2012 due to a shorter holiday period noted the Automobile Association of America. In 2012 the holiday landed on a Wednesday, creating a six-day vacation period for many Americans. This year it’s back to the typical five days, potentially cutting demand for gasoline in a year-on-year comparison.
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at [email protected].