By Brian L. Milne, Refined Fuels Editor for DTN
Retail gasoline prices will move higher across the country’s major metropolitan regions this week after values surged in wholesale markets during the first full week of May. The spark that lit the upside price rally afire was financial trading in energy commodities on signs suggesting that a deep, protracted recession in the United States might be coming to an end. Stock markets in the U.S. moved sharply higher in early May on reports showing that the manufacturing sectors for China and India were rebounding, with analysts using the data as a harbinger for a global economic recovery.
That was followed by the federal government’s release of bank stress tests that were viewed to be not as bad as expected, while a report from the Department of Labor showed job losses for April at 539,000, which was less than projected.
Additionally, the U.S. dollar weakened against the euro which makes commodities more costly in the U.S. Crude oil is traded in U.S. dollar denominations globally, so a weaker greenback means more are required to buy the same product.
Gasoline prices typically increase from late winter until July 4, partly because of a switch in gasoline to summer grade which is more costly to produce than the fuel sold in the winter. Additionally, refinery downtime in March and April for seasonal maintenance tends to tighten supply levels to push prices higher.
Holiday Increase
This year, however, it’s difficult to find a satisfying answer as to why gasoline prices would be climbing when commercial oil supply in the U.S. is at a 19 year high. Part of the reason is “numbness” by the financial community in the oil market to the supply glut. Another is the belief that the economy will rev higher once we escape the grip of the recession, with some declaring May to be the final month of the U.S. recession which started in December 2007.
This sentiment has prompted many investing in oil to follow the stock market, viewing the trend in equities as a leading indicator for crude and gasoline prices in the future.
Others warn of the potential folly in this approach, questioning why more than a half-million job losses in a single month is bullish for stocks, and, in turn, gasoline. The unemployment rate at 8.9% is the highest since 1983. Typically, demand for gasoline moves lower with higher unemployment since less people are traveling to and from work.
The report for April showed less job losses than were expected, and also had the fewest monthly job separations in the past six months, which is what investors highlighted, and what many gasoline traders latched on to; but not all.
View DTN’s Weekly and Historical Gas Prices
As of May 4, the federal government indicated that regular grade gasoline averaged $2.078 per gallon nationally. That number will increase this week, and expectations are for the retail price average to reach up to $2.25 to $2.30 per gallon this summer. So, expect the upward trend to continue through the Memorial Day holiday before running into a roadblock in early summer.
About the Author
Brian L. Milne is the Refined Fuels Editor for DTN-a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for nearly 14 years as an analyst, journalist and editor. He can be reached at [email protected].
