Climbing Gasoline Costs to Slow Retail Price Decline

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

Wholesale gasoline costs in the majority of US metropolitan markets moved higher during the first week of the fourth quarter, with some of those increases up sharply, climbing, in part, on easing concern that the U.S. would again slide into recession. The higher costs will, however, slow the decrease in retail prices that have declined for five straight weeks through Oct. 3, and in seven of the previous nine weeks.

According to the US Energy Information Administration, the statistical and analytical arm of the Department of Energy, the US retail gasoline price for all formulations of regular grade gasoline averaged $3.433 gallon on Oct. 3, the lowest since Feb. 28 when it averaged $3.383 gallon. We should see the average again decline when reported by the EIA late Tuesday (10/11) afternoon, with the nearest delivery RBOB (Reformulated Blendstock for Oxygenate Blending) futures contract traded on the New York Mercantile Exchange falling to a near eight-month low on Oct. 4. The RBOB contract is indexed against when gasoline is traded in the bulk physical market, which sets wholesale gasoline prices.

It takes roughly eight weeks for the entire price change from the refinery gate to be passed through to the retail pump, with 50% of that change reflected after two weeks and 80% after four weeks, EIA studies show. As such, the pass through costs are affected by pricing activity from nearly two months prior, but also from price changes within the previous two-week period.

Wholesale gasoline costs are moving sharply higher early during the second week of the fourth quarter, rallying on expectations that European Union leaders will at long last devise a plan to stem the fallout from Greece’s debt problem from infecting euro zone banks and triggering a credit crunch akin to what transpired when Lehman Brothers failed in September 2008.

Market sentiment is also improving as the U.S. is now increasingly seen as averting a recession, which would heavily pressure fuel demand. A series of better-than-expected readings on economic activity in the US from the service sector to manufacturing, to construction spending to retail sales assuaged worried investors to a degree. So did a higher-than-projected increase in new jobs reported for September by the Department of Labor, up 103,000, while the data for July and August was revised up by 99,000. While the job growth remains to slow to lower the unemployment rate, which was stuck at 9.1% in September, it did dent expectations that the US was moving back into recession.

US gasoline demand remains weak however, with the EIA recently revising demand for July down by 4.4% from its initial reading, which pressed the consumption total to a 10-year low for a July. Final data could still adjust the figure, but the recent revision illustrates the tough times for retailers, as the American consumer cuts back on trips amid high retail gasoline prices and persistently high unemployment. Still, the trend for oil demand to increase globally that is holding up world oil prices will continue to support a higher gasoline price compared with historical price patterns even if demand continues to erode.

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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