By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Those long gasoline futures on the New York Mercantile Exchange, with the contract called Reformulated Blendstock for Oxygenate Blending or RBOB, had a horrible week in early August, with a long position one in which the holder expects prices to increase. The September contract, which is now nearest delivery, erased more than 30 cents or 10% of its value during the first week of August, paring even deeper losses on Friday (8/5) with a 6.8 cents gain in a relief rally.
While bad for those speculators, this is good news for American consumers, which have been a downbeat crowd these days as economic clouds again darken. The sliding futures values, which are indexed against in bulk wholesale physical markets, will press retail prices sharply lower in August.
Oil and gasoline were caught in a selling vortex that gripped numerous markets as sentiment for the U.S. and European economies soured, with talk about another global recession triggering near panic selling at times. While selloffs as deep as those last week, with equity markets crashing hard, seem to occur all at once, this one was building due to unrealized economic improvement ballyhooed earlier in the year.
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A dismal 1.5% downside revision in US first quarter Gross Domestic Product to 0.4% growth and a 1.3% expansion in the second quarter announced in late July seemed to conclude what many were already saying, that the US economic recovery had stalled and was at risk of sliding back into recession. The European Central Bank intervened in the euro zone bond market last week for the first time since March, looking to avert the feared debt contagion that appeared ready to engulf Italy as its next victim.
What was on display in early August was a loss of confidence in the ability of European and U.S. governments to address sluggish to nonexistent economic growth amid a mountain of debt. The failure by the ECB to contain the debt crisis in Greece earlier this summer tied with the ugly battle in Washington over the debt ceiling and climbing deficit along with the deep GDP revisions led to a conclusion that those who should know how to address dismal economic performance don’t have a clue about what to do. This emperor with no clothes moment erased the typical faith afforded these institutions, triggering a mad dash for the exits.
In all of this, fundamentals for gasoline were poor in July, with preliminary data from the Energy Information Administration showing gasoline demand last month down 3.6% versus July 2010. Last month demand was the weakest in nine years for a July. Traders were also looking past the summer to when the seasonal hike in demand slows.
Look for 20-cent declines in retail prices throughout the country in mid-August, as the slide in wholesale costs filters to the pump. The futures market looks to have another leg down, so we could see steeper price decreases moving into September. If recessionary pressures intensify, this would be expected. However, ongoing economic weakness also increases the likelihood of government intervention through stimulus, such as the Federal Reserve’s bond buying program known as quantitative easing two, which ended June 30. QE2 was seen as a key catalyst in pushing oil prices higher from August 2010 to early May, so upside price risk remains.
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 firstname.lastname@example.org.