Wholesale Gasoline Costs Rebound from Late June Lows

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

Wholesale gasoline costs across major metropolitan markets in the U.S. moved up sharply from late June, reaching five-week or better highs following the July 4th holiday weekend from four-month lows registered in late June. The higher costs will arrest the decline in retail values, pushing pump prices higher in a number of markets in the U.S. early this week.

In financial gasoline trading, the New York Mercantile Exchange RBOB (Reformulated Blendstock for Oxygenate Blending) futures contract nearest delivery, which is used as the U.S. benchmark in guiding wholesale gasoline values, had sunk to a four-month low on June 27.

Pressuring the futures market was the surprise announcement on June 23 that the 28-country members that form the International Energy Agency (IEA) would release 60 million barrels of crude and finished products from their emergency reserves, with slightly more than 30 million barrels of that supply to be drawn from the U.S. Strategic Petroleum Reserve.

In making the announcement, IEA and the Obama administration said tapping the emergency reserves was essential to offset lost production from Libya, a member of the Organization of the Petroleum Exporting Countries, which has been engulfed in a civil war.

The emergency action, only the third time that emergency reserves have been drawn upon, pressured NYMEX RBOB futures nearest delivery to a $2.7348 gallon four-month low, fully retracing the price run-up since the violence in Libya intensified in late February.

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

However, the market moved up sharply from late June, with the nearby delivery RBOB futures contract trading at a $3.1295 gallon five-week on July 7, and only two ticks less than that on July 8. The rally came amid expectations that oil demand will continue to grow this year and in 2012, led by emerging countries such as China that are gobbling up raw materials as they advance development of their economies.

The rapid increase in forecasted global oil consumption is expected to challenge ongoing production as early as late this year, early 2012, several analysts project, prompting inventory draw downs. Several banks, including Barclay’s, Morgan Stanley and Goldman Sachs, reaffirmed or increased their projected price for key crude oils, such as European Brent crude and U.S. West Texas Intermediate crude, in early July, highlighting what they expect to be a tightening supply-demand balance that drives up costs.

“In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply,” said Goldman Sachs in a weekly report released July 7.

Weakened Economy
NYMEX RBOB futures sold off later in the July 8 session, and is down sharply as of this writing Monday (7/11) morning following an especially dismal report on jobs in the U.S. released by the Department of Labor early July 8. The Labor Department reported an anemic 18,000 new jobs in June while revising May’s already weak 54,000 new jobs down to 25,000. The U.S. unemployment rate has now increased 0.4% from March to 9.2% in June, offering more evidence that the U.S. economic recovery has slowed dramatically from earlier in the year.

High unemployment is a drag on U.S. gasoline demand, and the numbers are bearing that out. Preliminary data from the Energy Information Administration (EIA) shows implied gasoline demand, which is the amount of product supplied to the primary wholesale market, was down 0.6% during the four weeks ended July 1 against the same timeframe in 2010, and is cumulatively down 0.3% versus 2010 during the first six months of the year.

The price advance by gasoline in early July has been arrested in the near-term as the jobs report, among other negative features on the global economy such as the European debt crisis and Washington gridlock on the debt ceiling, has turned upbeat forecasts gloomy.

However, while gasoline prices are again moving lower, market watchers should not expect prices to collapse. There could be additional price pressure in August as the crude oil from the SPR is released and adds to overall commercial inventory levels reported on weekly.

Also, gasoline prices could come under additional price pressure in September as the summer driving season ends, although global oil demand is higher in the second half of the year, peaking in the fourth 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 15 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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