Gasoline Prices Pulled Higher by Climbing Crude Costs

By Brian L. Milne, Refined Fuels Editor, Telvent DTN

 

A sharp increase in wholesale gasoline costs during the first half of October will continue to push retail prices higher across the country through to Halloween, with wholesale costs up roughly 15 percent from the end of September through Oct. 16.

 

Just about all major metropolitan markets experienced a double-digit increase in their wholesale costs during the second full week of October, with the wholesale market climbing 10% in that time. The exception was California, where wholesale costs increased less dramatically, narrowing the state’s premium to other markets in the U.S.

 

Typically, the catalyst for a price surge in gasoline this time of year would be a hurricane disrupting oil production in the Gulf of Mexico or refining output in Texas and Louisiana. This season is noteworthy for the lack of hurricane activity in the Atlantic Basin however. Instead, optimism over the global economy and a weakening US dollar have been the price drivers behind the October rally.

 

Generally speaking, third quarter earnings reports from US corporations have been better than expected, sparking a rally in equities, including a move by the Dow Jones Industrial Average above 10,000 for the first time since October 2008. Coinciding with the psychological boost in equities was a rally by crude futures to a one-year high above $75 per barrel, which is significant.

 

The move above $75 triggered a heavy flow of buying, with crude now expected to trade above $80 per barrel in the near term. This translates into higher gasoline prices.

 

Higher Crude Prices

Meanwhile, the weakening U.S. dollar has also underpinned the resurgence in crude prices, which had tumbled into the low $30s per barrel earlier this year. A weaker U.S. dollar means domestic buyers of crude oil need more of them to buy the same barrel of crude then if its value had not changed. The greenback fell to a 14-month low against international currencies last week.

 

Moreover, the U.S. dollar remains under pressure. News that U.S. debt had exploded to $1.42 trillion, which is 10% of gross domestic product, suggests interest earned with the greenback will remain limited for a long while, discouraging investment in the US dollar.

 

Preliminary data shows demand for gasoline has increased slightly, up 0.3%, so far this year compared with 2008, with this trend expected to continue.

 

Meanwhile, gasoline supply remains at a surplus compared with 2008, but refiners have cut production sharply in an effort to reduce the surplus. This effort, dovetailed with optimism over the economy and a weaker U.S. dollar should support higher gasoline prices in the coming weeks.

 

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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