By Brian L. Milne, Refined Fuels Editor, Telvent DTN
On the first business day of May, the gasoline futures market which is used as a benchmark in pricing gasoline in the wholesale physical market, spiked to a 19-month high. Three days later on May 6, the gasoline futures contract tumbled 34.57 cents or 14.2% from the 19-month high to a 10-week low.
What changed? The answer is the market’s confidence.
The rally to the high was spurred on by expectations for rising consumption of fuels with a recovering economy. In the United States, corporate profits for the first three months of 2010 were mostly better than market expectations, while new manufacturing activity was surging to pre-recession levels, albeit from historic lows.
There were encouraging signs that the employment picture was at long last starting to see improvement, while the initial reading of first quarter Gross Domestic Product detailed economic expansion for the U.S. led by consumer spending.
By May 6, riots in Greece sparked by austerity measures – sharp cut in government spending and raising taxes -agreed to by the Greek Parliament triggered concern by traders, which were aggressively selling stocks and commodities. The austerity measures were a condition made by euro-zone countries and the International Monetary Fund for a $145.5 billion bailout for Greece, which was cheered by the markets earlier in the week.
The riots, which included three fatalities after a Greek bank was fired bombed by violent protestors on May 5 prompted the market to reel, questioning if the bailout efforts would work to stop the spread of sovereign debt not just for Greece, but elsewhere in Europe, namely Portugal.
While this was unraveling, the U.S. dollar strengthened to a one-year high against the euro, making commodities which are traded globally in U.S. dollar denominations, less expensive in this country. Crude oil, gasoline and diesel prices were sent tumbling on this, and fear that the economic recovery could suffer from a new wave of credit defaults.
During this tumultuous backdrop being played live across several business channels during the afternoon of May 6, the stock markets took a historic plunge, with the Dow Jones Industrial Average losing 1,000 points at one point. The sudden, heart-pounding drop in equities was subsequently linked to a trader error, in which a trader at a Wall Street bank during a sell order typed in a billion shares instead of a million. Circuit breakers at the New York Stock Exchange were triggered, halting trading of some company stocks.
However, trading of these stocks were taking place elsewhere, with less buyers accelerating the price drop. As the investigation continued, new high-speed trading done by computers that were turned off during this time was seen having a massive negative impact on the market that afternoon.
By day’s end, the NYSE had cancelled some trades during the afternoon window when stock prices free fell. Oil futures found a bottom by Friday. By Monday (5/10), they were again rallying on news that 16 countries that use the euro and the IMF agreed to create a nearly $1 trillion rescue fund to support European nations burdened by debt, easing the fears of credit defaults, and strengthening the euro against the U.S. dollar.
From May 3 to Monday, wholesale gasoline costs tumbled more than 20 cents per gallon in major metropolitan markets east of the Rocky Mountains, with some of those wholesale costs down nearly 30 cents. Markets along the West Coast and in the Rocky Mountain region also posted sharp declines.
The steep declines in the wholesale market will reverse the recent price advance in retail gasoline prices. This comes after the US regular grade gasoline price average had jumped to a $2.90 gallon 18-month high on May 3.
Expectations for another dime increase in the U.S. gasoline average to $3 gallon by Memorial Day are in jeopardy after the first week of trading in May, which would offer consumers respite from increasing out-of-wallet expenses. However, the markets remain extremely volatile, and gasoline prices could again run up if the broader markets believe that the Greek debt default issues have been contained.
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 firstname.lastname@example.org.