Fuel Increases Recede

By Brian L. Milne is the Refined Fuels Editor for Telvent DTN

 

Heading into mid-August, retail gasoline prices will be mixed across the country’s major metropolitan markets following choppy price action in wholesale markets during the first full week of the month.

 

While the bias was on the downside, wholesale costs moved higher in most major markets along the West Coast.

 

Price activity in the gasoline wholesale markets have been volatile this summer, which is a characteristic expected to endure. The volatile nature of the markets, which includes wide price swings and frequent reversals in daily price direction, makes it difficult to forecast pricing too far ahead into the future.

 

Shorter term, last week’s choppy price action will mix the response by retailers nationwide. Retailers react far more quickly to price changes in the wholesale markets than in years past, so a down week in wholesale costs for gasoline might not render a lower pump price should the market subsequently increase. In other words, a decline in wholesale costs might serve to limit higher pass-through costs, keeping pump prices closer to unchanged instead of moving them lower.

 

Part of this recent reality is due to a disconnect between the market’s fundamental factors, which refers to the disposition of available supply against immediate to near-term demand, and what is deemed fair market value.

 

Driving price changes at the pump this summer have more to do with the projected economic health of the country looking ahead. So a rallying stock market, which is viewed as a forward indicator of economic health, has pushed up prices, with crude oil prices consolidating above $70 per barrel–more than double their $32.70 low reached in late January.

 

The debt load being absorbed by the U.S. government has been another interesting factor exerting its influence over crude oil and gasoline prices. The climbing debt load pressed the U.S. dollar to lows against the euro last seen in September 2008 at the start of August.

 

However, an unexpected 0.1% dip in the unemployment rate in July halted the slide, strengthening the U.S. dollar that, in turn, pressured crude oil and gasoline prices.

 

View DTN’s Weekly and Historical Gas Prices.

 

Since oil trades globally in U.S. dollar denominations, its weakness requires more greenbacks to buy the same barrel of crude, while the reverse is true when the dollar strengthens.

 

Cut Concerns

Higher prices have also been supported by several months of cuts in crude oil production by members of the Organization of Petroleum Exporting Countries. Here in the U.S., oil refiners are processing less crude oil into gasoline than in previous years, looking to limit inventory building which has underpinned gasoline prices too.

 

Some view the higher price action by crude oil and gasoline tenuous, with these critics highlighting abundant available supply. Those following fundamental factors expect a steep crash in prices when we move past Labor Day.

 

Others believe the U.S. will be that much closer to an economic recovery that will spark more demand for fuels. Time will tell which camp is correct. In the meantime, expect choppy price action amid a higher trending market during August.

 

 

About the Author

Brian L. Milne is the Refined Fuels Editor for Telvent 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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