“Dented” Demand, No Matter, Gasoline Prices to continue Higher

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

Retail gasoline prices in the U.S. have more upside despite broader market concern that high commodity prices would crimp the global economic recovery and, in turn, dampen demand for oil and its byproducts like gasoline.

High gasoline prices act as an additional tax on American consumers, cutting into discretionary spending as well as road travel.

In a monthly outlook report released April 12, analysts with the International Energy Agency cautioned on the negative knock-on effect of soaring oil prices, saying preliminary data for January and February already showed “dented” demand. The Energy Information Administration (EIA) revised its global oil demand outlook down on those same worries in a report issued the same day.

View Telven DTN’s Weekly and Historical Gasoline Price Index.

Lower economic growth due to high commodity prices was also the topic of an April 11 report from Goldman Sachs, which advised clients to book profits ahead of what the investment bank sees as a price pullback. The markets did selloff on the report, with New York Mercantile Exchange oil futures sliding from a 2-1/2 year high of $113.46 per barrel on the day it was issued to a two-week low at $105.31 on April 13. It was again over $110 bbl on April 15, with the reversal triggered primarily by a steep weekly decline in U.S. gasoline inventory amid higher demand and lower production of the fuel.

Selling remerged Monday (4/18) amid a confluence of bearish news. Standard & Poor’s downgraded the long-term credit outlook for the U.S. from stable to negative, citing a potential congressional deadlock in efforts to reduce the deficit. This report pressured both equities and commodities due to fear of slower economic growth.

Production Cut
Also, news initially circulating the markets late last week that Saudi Arabia cut its oil output because of a lack of demand for the barrels was confirmed Sunday (4/17) by the country’s oil minister, Ali al-Naimi. Saudi Arabia, the world’s largest reserve holder of oil as well as what is considered to be the de facto leader of the Organization of the Petroleum Exporting Countries, cut production by 800,000 barrels per day, the minister said.

Saudi Arabia had increased its oil output to offset the loss to the market of Libyan crude oil due to the ongoing civil war there, which averaged 1.65 million barrels per day in 2010 through January, according to the EIA. Ali al-Naimi said, however, that the market was oversupplied and didn’t need the extra production; a view echoed by fellow OPEC member Kuwait.

Oil traders are now in a tug-of-war between the possibility of increased supply disruptions from the Middle East and North African regions amid civil unrest and the prospect of demand destruction due to high fuel prices.

Oil prices will extend lower in the near term, but the decline will be transitory. Moreover, higher wholesale costs are still working their way through the supply chain, meaning retail gasoline prices don’t yet reflect the recent rise in oil values. In fact, the US gasoline futures benchmark, NYMEX RBOB (Reformulated Blendstock for Oxygenate Blending), soared to a fresh 33-month high for the nearest delivery contract on April 15, pushing up weekly wholesale costs for gasoline through Monday (4/18). It will take another week or two for the full impact of these recent gains to be felt at the pump.

The EIA said the US average price for regular grade gasoline averaged $3.791 gallon on April 11, a nearly 31-month high. Analysts with the EIA in a recent outlook project the average at $3.86 gallon during the peak driving season from April 1 through Sept. 30, saying some regions of the country would see prices 25cts gallon above the national average.

So, despite evidence that high prices are acting like a drag on gasoline demand, don’t expect a reversal in escalating retail prices in the near term.

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

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