Rally in Wholesale Gasoline Prices Hits Wall

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

When gasoline prices at the pump spike, consumers should realize that theses daily and weekly changes are muted when considering the extraordinary volatility in the wholesale market. This risk is primarily borne by wholesalers and retailers that look to more gradually pass on these costs to consumers that can and do eat into their margins.

It’s also why retail prices will hold higher despite a downturn in wholesale costs, as wholesalers and retailers look to recoup this margin loss. Retailers, in particular, view fuel margin performance on a monthly and quarterly basis as a result, wanting to smooth out this dynamic in their profit and loss statements.

This feature is evident when considering the 1.4 cents decline in retail prices for regular grade gasoline nationally to $2.735 per gallon for the week-ended Aug. 2 despite a move higher in benchmark futures in late July. Regionally, retail gasoline prices were mixed, with the Midwest sharply lower, skewing the average to the downside.

Wholesale gasoline prices moved up across the country during the first week of August, starting the month sharply higher, but giving back some of those gains by week-end following bearish data on jobs released by the federal government. Still, the U.S. average for all formulations of regular grade gasoline should move higher this week.

The Bureau of Labor Statistics, a division within the Department of Labor, said 131,000 non-farm jobs were lost in July, double market expectations, which sent oil markets lower on Aug. 6. The steep decline was due to the end of 143,000 temporary census workers, but also shows anemic job growth. The private sector did create 71,000 jobs in July, but that was down from the 83,000 new private sector jobs in June and below market estimates projecting 100,000 or more new jobs.

This is not a good development for the U.S. economy or for fuel demand. It adds evidence that the economic recovery has slowed, and raises doubts on its performance for the remainder of the year. The high jobless rate, which remained unchanged in July at 9.5% as the number of discouraged workers increased last month, bodes poorly for gasoline demand.

Gasoline demand correlates closely with unemployment since there are fewer workers making the roundtrip commute to work. Demand figures were high in July amid summer vacation travel, but will slide in September. This should pressure wholesale gasoline prices as we move past Labor Day.

However, that might not happen, and the reason has to do with the slowing economy and the recent weakness of the dollar. The greenback tumbled in late July, early August, slumping to a better than three-month low against the euro. And because of the slow pace of the economic recovery and the stubbornly high unemployment rate, there is a great deal of chatter in the markets that the Federal Reserve will announce a resumption of quantitative easing when it meets this month. That means the Fed could lower the already historically low overnight interbank borrowing rate from 0.25% to zero, add to its balance sheet by purchasing others debt, or some other feature whereby the value of the currency of the U.S. is eroded. This, in turn, would lift oil and gasoline prices.

Another possible impetus for higher gasoline prices could come from hurricanes, with the Atlantic Basin nearing the season’s peak period. From late August through September, storm activity increases while the strength of hurricanes intensifies. Moreover, the National Oceanic and Atmospheric Administration on Aug. 5 reaffirmed its outlook for a very active hurricane season this year.

So, despite abundant supply and an expected slowdown in demand, be on the lookout for higher gasoline prices as we move through the third quarter.

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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