Lower Gasoline Costs Moving Through Supply Chain

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

The Energy Information Administration’s (EIA) U.S. retail price average for all formulations of regular grade gasoline fell 6 cents as of Sept. 19, and will continue to move lower into October on declining wholesale gasoline costs.

Through the week-ended Sept. 26, wholesale gasoline costs moved lower in major metropolitan areas across the country, with most cities seeing a dime or better drop for the period.

The sliding costs are a seasonal feature, but also influenced by increasing fear over an economic slowdown that would further dampen already weak demand. High unemployment, with the U.S. unemployment rate seen hovering above 9% through 2012, is a key factor in why gasoline demand has been weak this year.

Data released by the American Petroleum Institute on Sept. 23 shows gasoline demand fell 1.3% to 9.133 million barrels per day (bpd) in August, which is a 10-year low for the month. Gasoline demand was higher than in July, said API, but is down 2% for the first eight months of the year compared with the same timeframe in 2010.

“The U.S. economy is still struggling,” said API Chief Economist John Felmy. “Retail sales are weak, and we’re seeing a reflection of that in the gasoline demand numbers.”

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

API said the U.S. economy is struggling to gain traction, with continued weakness in consumer spending a key measure that accounts for nearly two-thirds of U.S. economic activity. The latest data from the U.S. Department of Commerce suggests that retail sales growth in the first two months of the third quarter was weak as the political gridlock over the U.S. budget continued to stall consumer confidence levels.

Worry over further economic malaise was heightened by the Federal Reserve in closing comments to a two-day meeting on Sept. 21. The central bank said in a statement that day that, “There are significant downside risks to the economic outlook, including strains in global financial markets.”

The word “significant” triggered selling across numerous asset classes, including oil. The New York Mercantile Exchange gasoline futures contract, called Reformulated Blendstock for Oxygenate Blending, has plumbed better than seven-month lows since the statement.

Meanwhile, events in Europe are sparking increased worry. Many now believe a default by Greece on its debt obligations is inevitable, with such an event having the potential to spread to other euro zone countries, such as Italy. European banks would be hard hit, and that would spread to U.S. banks as well.

These concerns have intensified because euro zone leaders have been unable to decide upon a course of action to finally move past this long-standing issue. Should euro zone leaders, with their backs now up against the wall, finally achieve some agreement on concluding the Greek saga and its potentially perilous contagion effect, we could see economic stability. This would go a long way in expanding economies and, in turn, generating job growth and increasing fuel demand.

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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