By Brian L. Milne, Energy Editor, Schneider Electric
The session before expiring on the last business day of August, the September gasoline futures contract rallied to a $3.1095 gallon six-week high on the spot continuation chart, spurred higher by concern over U.S. military intervention in Syria in response to evidence the Syrian government used the nerve agent sarin gas on its citizens Aug. 21.
Gasoline rallies this time of year are typically caused by supply disruption or feared disruption due to hurricanes or unexpected shut downs of a key refinery or more. The worry that Syria or close ally Iran with support from Hezbollah would respond to a U.S. military strike through terrorism or some other action in the Middle East pushed crude prices higher late August that, in turn, pushed up gasoline futures.
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The embedded risk premium in crude prices was partially walked back after the British Parliament voted late Aug. 29 that it would not join the United States in a strike against Syria. During the Labor Day weekend, President Barak Obama said he would seek Congressional approval for such a strike after the White House initially signaled the president did not need such authorization, and that a strike was imminent. Congress is expected to vote on military action during the week of Sept. 9, suggesting no immediate attacks on the Syrian regime for its illegal use of poisonous gas.
October RBOB (Reformulated Blendstock for Oxygenate Blending) futures, the gasoline futures contract trading on the New York Mercantile Exchange, gapped down nearly 11cts as it took over for the now expired September contract, reflecting seasonal weakness. Gasoline demand is strongest during the summer months, with vehicle miles driven in September consistently lower than during August.
The drop back in futures also captures lower processing costs, with refiners now producing higher Reid vapor pressure gasoline. RVP levels are strictest during the summer months. A lower RVP gasoline costs more to produce than higher RVP product.
Seasonal Pressure
The seasonality feature will pressure gasoline prices going forward. First, however, the late August push higher by wholesale gasoline costs needs to work its way through the supply chain, with pass through costs pushing retail values higher near term.
The Energy Information Administration (EIA) highlighted two pricing features in late August, first noting its US retail average price for regular grade gasoline headed into the Labor Day weekend was 19cts or 5% lower than in 2012 at $3.55 gallon. The average was also 3 cents less than in 2011.
EIA added the US average has been pressured primarily be lower retail prices in California, with state gasoline sales accounting for nearly two-thirds of all sales along the West Coast. In contrast to 2012, the West Coast gasoline market was well supplied this summer, recovering from downtime at regional refineries early in the year. In 2012, a series of unexpected refinery outages left the market tight for much of the year, including the summer, before recovering during autumn.
EIA said a 5.1% decline in the price of retail regular grade gasoline along the West Coast over the five weeks through Aug. 26 pressed the U.S. average down 3.5% over that time span.
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].
