Gasoline Costs Get Upside Bump on Futures Rally

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

Gasoline in futures trading on the New York Mercantile Exchange rallied to a better than two-month high midway through July, with the advance underpinned by draw downs from national inventory levels, refinery outages and a weaker U.S. dollar. Technical chart signals also triggered buying in the futures markets. The market has since moved lower, but is still averaging well above June values.

This trading lifted wholesale gasoline costs, although week-to-week gains have been trimmed since with selling in the futures market. Still, retail gasoline prices will edge higher in most markets across the U.S., which follows a sharp 6.2 cents gain in the national average price for regular grade gasoline for the week-ended July 11 to $3.641, according to the Energy Information Administration (EIA). That compares with the $3.965 gallon 32-month high reached on May 9.

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

Despite the higher moving market midway through July, there should be limited upside for gasoline costs for the remainder of the summer, when gasoline demand peaks. Typically gasoline prices slide in September when driving demand slows from summer highs, and futures markets are always look ahead, currently trading the August contract. Moreover, worry over the slowing U.S. economic recovery has so far capped NYMEX crude futures below $100 barrel.

Expanding economies use more energy, so a slowdown in economic growth is a drag on energy demand. On July 13, when NYMEX RBOB (Reformulated Blendstock for Oxygenate Blending) futures, the gasoline contract, rallied to a better than two-month high, markets were also anticipating the Federal Reserve to provide some other stimulus for the economy.

In Congressional testimony that day, Fed Chairman Ben Bernanke said that the central bank would again act if the US economic recovery was in jeopardy. The markets took that as an indication that the Fed would launch QE3, which refers to quantitative easing that aims to spur greater economic activity through monetary policy. The Fed just completed QE2 on June 30, which involved a $600 billion bond buying program by the central bank. One of the side effects was a weaker dollar since the central bank is taking on more debt that, in turn, supports higher oil prices since oil trades globally in US dollar denominations.

On July 14, Bernanke walked back the comment, saying the Fed would act should the economy worsen, but said there were no immediate plans for QE3. The markets sold off on that news, which knocked NYMEX RBOB futures from its high.

In its most recent Short-term Energy Outlook released July 12, the EIA revised its forecast for regular grade retail gasoline prices lower, now expecting them to average $3.56 gallon this year, 4cts below its prior month estimate. In 2010, the average was $2.78 gallon.

EIA anticipates regular grade gasoline will average $3.62 gallon and $3.51 gallon, respectively, over the third and fourth quarters. EIA forecasts the average for regular gasoline to be $3.65 gallon in 2012, a 2 cents decline from June’s Outlook.

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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