Worries Over Economy Pressuring Oil Prices

Brian L. Milne, Refined Fuels Editor, Telvent DTN

Wholesale gasoline costs are again moving lower, pressured in early June by worry over economic growth highlighted by an increase in the U.S. unemployment rate in May. Poor results in manufacturing and housing detailed in recent data releases have also piled onto the heightening concern over the U.S. economy, while consumer confidence flags.

A slowing economy translates into less demand for oil while a high unemployment rate, which increased to 9.1% in May from 9% in April amid the slowest job creation rate, a paltry 54,000 new jobs, in eight months, has a negative impact on gasoline consumption. Renewed worry over tepid economic growth in the second quarter reversed an upbeat assessment for U.S. economic expansion in the first quarter that had initially driven higher oil prices.

However, high oil prices are now seen as a leading culprit in slowing economic growth not just in the U.S., but globally as well.

There are “many moving parts” in the oil markets that can quickly reverse its pricing direction, including a series of refinery and pipeline outages along with worry over the impact of flooding along the Mississippi River and elsewhere seen in the second quarter. Still, it increasingly appears that retail prices have installed a seasonal high.

“Although risks still linger, there are reasons to think that, for most regions, the summer weekly gasoline peak price may be behind us,” the Energy Information Administration said on June 3.

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

EIA projects the U.S. average for regular grade gasoline to average $3.88 gallon in June, about the same as in May, with prices continuing to ease over the rest of the summer, averaging $3.76 gallon during August.

In making its comments, the EIA reviewed the host of issues that conspired to propel the U.S. gasoline average to a $3.965 gallon better than 32-month high in early May, including crude oil supply disruptions resulting from unrest in the Middle East and North Africa.

“More recently, however, unusually wide gyrations in wholesale gasoline prices have shown that downstream factors closer to consumer markets can also greatly affect prices at the pump,” said EIA.

Mounting Concerns
They pointed to three factors, including unplanned refinery outages in the Gulf Coast and East Coast; supply not keeping up with demand; and concerns over refinery and pipeline flooding earlier in the quarter.

More recently, a string of refinery outages in late May and early June in the Midwest have driven wholesale costs higher there. Yet, supply from the Gulf Coast moved by pipeline reached the Chicago market over the weekend, sharply pressuring spot wholesale prices for the region that will further weigh on retail gasoline prices.

On June 8, members of the Organization of the Petroleum Exporting Countries will meet in Vienna, with reports now indicating that a majority of members support increasing oil production. OPEC members had previously suggested that there was enough oil in the world market, but appear to be moving closer to hiking output in order to pressure world oil prices that are seen as a threat to the global economic expansion.

The U.S. oil price benchmark is hovering on either side of $100 bbl, although Brent crude oil, which is considered a better global oil marker, is trading near $115 per barrel.

Higher output from OPEC, which accounts for roughly 40% of the world’s oil production, would exert downward pressure on oil and gasoline 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 15 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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