By Brian L. Milne, Energy Editor, Schneider Electric
U.S. retail gasoline prices fell to a five-week low Aug. 12, but the futures contract for gasoline then gained more than 6.0cts during the week-ended Aug. 16, with the 2.1% advance supporting higher wholesale costs in a number of metropolitan markets. A decline in pass through costs from earlier in August when the futures contract slumped to a one-month low should keep retail prices moving lower.
We are in the waning days of summer with lower gasoline demand set to take hold in a short couple of weeks from now following an early Labor Day this year. Historically, gasoline demand always declines in September from the August consumption rate.
Preliminary data from the Energy Information Administration (EIA) shows a robust summer of road travel, with implied gasoline demand averaging 9 million barrels per day (bpd) since Memorial Day. That’s down 184,000 bpd or 2% from the five-year average, but up 135,500 bpd or 1.5% from the comparable year-ago period. After running flat with a year ago leading up to the summer, implied gasoline demand in 2013 through early August is now up 0.6%.
The stronger demand comes alongside an improving U.S. economy, although the growth rate remains tepid. Initial jobless claims filed during the week-ended Aug. 10 fell to a six-year low, a positive development for the economy and gasoline demand. Meanwhile, inflation remains benign.
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Economic data has been mixed, with housing starts in July less-than-forecast while consumer confidence declined in August versus expectations for a move higher, albeit confidence slid from July’s six-year high. There have also been bullish data points internationally, including a jump in industrial output in July for China and news midmonth August that the euro zone escaped recession in the second quarter.
Fed May Act
Although there remain potholes along the road to economic recovery, there’s growing sentiment supported by comments from some officials that the Federal Reserve is ready to begin tapering its asset purchasing stimulus efforts. The central bank is buying government assets to the tune of $85 billion a month, adding liquidity to a market that already has the overnight bank lending rate near zero. The tapering could come as soon as September, with markets expected to selloff in reaction to a slight tightening from the easy money spigot. Tapering should also support a stronger U.S. dollar, which is bearish for oil prices since crude trades internationally in the greenback.
Noncommercial market participants, or speculators since they are not hedging an underlying physical position in the market, are laying off risk in gasoline futures data from the Commodity Futures Trading Commission shows. Supportive fundamentals in July, including supply drawdowns, robust demand and reduced refinery runs along with a shut crude pipeline in Canada joined by the military coup in Egypt prompted speculators to go long mid-summer.
At the July 29 close of trade, noncommercials amassed a 4-1/2 month high net-long position in New York Mercantile Exchange RBOB futures, with a long position taken when the expectation is for prices to gain. The latest available data from the CFTC shows speculators liquidated 19.5% of that position through Aug. 13, cutting the net-long stance to a one-month low.
Since Labor Day is just around the corner, it’s unlikely we would see this trading group, which is followed because of their ability to open and close positions quickly since they are not tied to a hedge thereby offering clues for market turns, would again build up this position.
Still, we are now in the peak hurricane season and blood is staining the streets in Egypt, providing the backdrop for a rally in oil prices that lift crude costs and push gasoline prices higher should either of these features disrupt oil supply. Meanwhile, September NYMEX RBOB futures are trading at a 12cts premium to the October contract as gasoline’s peak demand season nears conclusion.
About the Author
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]