Pullback in Wholesale Costs Leads to Fuel Price Decline

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

Better than a nickel decline in wholesale prices for metropolitan markets across the U.S. during the weekly period ended on Martin Luther King Jr. Day will arrest the rapid increase in retail gasoline prices seen since late 2009.

The U.S. average retail price for regular grade gasoline spiked to its highest price since Oct. 20, 2008 on Jan. 11 at $2.751 gallon

Gasoline prices surged to start 2010, driven higher by speculation that a recovering US economy following the Great Recession would trigger increased demand for crude oil and gasoline. However, large increases in the nation’s supply of crude and gasoline reported early this year in the face of sluggish fuel demand alongside mixed data on the broader economy prompted a pullback.

Many are now thinking that the market got ahead of itself, with that view triggering selling to pressure prices from their 15-month highs.

More Declines Coming

Retail gasoline prices could drop by as much as 20 cents over the next several weeks amid this downside price correction in the wholesale market. However, there are several risks to this scenario, including more investment dollars into oil. Speculation on what will occur in the oil markets was the reason for the run to 15-month highs, with the long-term market sentiment remaining bullish despite the recent price decline.

In support of this view, the Energy Information Administration (EIA), the statistical arm of the Department of Energy expects a U.S. retail gasoline average for this year at $2.84 gallon, nearly 50 cents higher than the 2009 average. The agency also anticipates the gasoline average to crack above $3 gallon at some point during upcoming spring and summer.

The EIA is projecting higher demand for gasoline this year to help drive the price advance, while oil refineries are keeping the US production rate of gasoline well below their historical rates in an effort to realign supply with demand.

By 2011, the EIA expects retail regular grade gasoline to average $2.96 gal.

So while motorists will get minor relief at the pump in the short-term, longer-term, prices will trend higher.

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 more than 14 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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