Boost in Crude Costs to Offset Pass Through Savings

Brian L. Milne, Refined Fuels Editor, Telvent DTN

Weekly gains in the gasoline wholesale market driven by higher crude costs leading up to the Valentine’s Day weekend will interrupt the national decline in retail gasoline prices midway through February. The U.S. average price for retail gasoline prices had decreased for four consecutive weeks through the first week of February.

Retail prices will be mixed across the country, with residual pass though savings from lower wholesale costs in early February limiting the impact in some metropolitan markets, potentially continuing the decline. However, the recent higher costs will pare back savings at the pump, while pushing retail prices for gasoline higher in a number of markets.

Supporting the increase in costs was renewed optimism for U.S. and global economies in 2010. Both the U.S. government’s Energy Information Administration (EIA) and the Paris-based International Energy Agency (IEA) said in early February that improvements in the outlook for the world economy prompted them to revise higher their forecast for global oil consumption this year. Those views also stoked crude costs higher.

The EIA and IEA were both created after the early 1970s oil embargo by the Organization of Petroleum Exporting Countries against western nations supporting Israel. The two organizations collect data on energy and produce outlooks for oil, offering clearer visibility for oil consuming countries and the impact of oil on their economies.

While costs have moved higher, fundamentals for the market remain weak, with implied demand for gasoline down 0.7% for the most recent monthly period against the same timeframe in 2009. Heavy snowfall in much of the U.S. curtailed driving this month, limiting demand for gasoline while supply increases. In fact, U.S. gasoline in inventory is near a two-year high.

Two opposing features for the gasoline market now are the enduring high U.S. unemployment rate, which reduces demand for gasoline, and lower gasoline production by US oil refiners. On the latter, already low refinery production will be suppressed further by seasonal maintenance, which would work the high inventory level in gasoline down.

Additionally, refiners typically build up gasoline supply before this maintenance period, so we should expect supply to be drawn down in the coming weeks.

The EIA in early February pointed to the potential for the U.S. gasoline average to top $3 gallon this spring and summer, saying parts of the country with higher gasoline costs such as California will very likely see plus $3 gallon prices at the pump this spring. Driving these gains say the EIA are climbing crude prices.

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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