Pump Prices Edge Higher

By Brian L. Milne, Refined Fuels Editor for DTN

A potential strike by United Steelworkers at oil refineries that could have impacted as much as two-thirds of oil refining capacity in the U.S. was averted on Feb. 3 after the two sides hobbled together a three-year agreement, taking away a worry that lost gasoline production would lead to sharply higher prices at local outlet pumps.

However, wholesale gasoline prices did continue up during the first week of February, and are continuing to advance as we head towards Valentine’s Day as government data showed that reduced gasoline output has slowed inventory building while presumed demand popped higher during the final week of January.

Another factor underpinning price support for gasoline is a growing consensus that crude oil prices have found a bottom, with crude oil the biggest cost component in each gallon of gasoline.

It’s extraordinarily difficult to pick major tops and bottoms in commodity markets, but some veteran analysts believe that U.S. benchmark crude will hover around $40 per barrel. Talk by some oil ministers in the Organization of Petroleum Exporting Countries (OPEC) that if crude prices fail to halt their slide members will consider another cut in their production rate is also lending upside price support. OPEC has made three production cuts since September 2008 totaling 4.2 million barrels per day, with representatives currently talking about a 1 million barrel per day output cut on top of that when they meet March 15.

Sluggish Demand
These bullish influences need to be tempered by a poor economic outlook, with a recent Department of Labor report showing 598,000 people lost their jobs in January, pushing the national unemployment rate up to 7.6%. The Labor department said 3.6 million jobs have been lost since the recession started in December 2007, with nearly half of those job losses occurring since November 2008.

There is a close relationship between unemployment in the U.S. and gasoline demand that shows the higher the rate of unemployed, a lower amount of gasoline is consumed. That’s easy to understand, as miles driven to work decreases.

Once again, all regions of the country should expect higher prices at their local outlets, with the greatest increases in California. The price increases will not follow the spiking values seen during the first half of 2008, but lower gasoline output as refineries undergo maintenance during the next couple of months will be another factor limiting the potential for a price decline at the pump.

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 brian.milne@dtn.com.

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