By Brian L. Milne, Refined Fuels Editor for Telvent DTN
From the Friday before Memorial Day to June 1, the gasoline futures contract took a 23.61 cents or 8.2% plunge in value, with the contract early Monday (6/4) trading at its lowest point in 2012 at $2.5971 gallon. The precipitous drop came with a host of disappointing economic news from around the globe, namely the ongoing euro zone crisis and May’s non-farm payroll employment report that threatens oil demand.
Right up to the late May, early June selloff, talking heads said the U.S. would be insulated from the worst of the Euro zone crisis, suggesting the economies were disconnected. Yet, a downgrade in U.S. first quarter gross domestic product from an initial 2.2% reading to 1.9% announced on May 31 was followed on June 1 by an utterly dismal employment report. The Bureau of Labor Statistics said a paltry 69,000 jobs were created by the U.S. economy in May, less than half the number expected, while BLS also downwardly revised March and April’s new jobs numbers by 49,000. The U.S. jobless rate ticked up to 8.2%.
The unemployment report followed data showing slowing manufacturing growth in the euro zone and Asian economies, while Spain’s short-term borrowing costs surged to a point some think will force the sovereign to seek bailout funds. Meanwhile, there remains much angst over the fate of the euro should Greece, which holds elections on June 17, pull out of the single currency union.
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Confidence has been badly shaken. Talk of the possibility of a return to recession is now circulating three years after the U.S. escaped the Great Recession in July 2009. All of this portends poorly for fuel demand.
Historically, domestic gasoline demand has tracked with the health of U.S. employment and U.S. diesel demand with GDP. The dreadful data, coming at a time when some economists said both economic and employment job growth should be booming based on historical comparisons, slows fuel demand.
The Energy Information Administration (EIA) shows gasoline supplied to the primary market running 5.2% behind 2011’s implied demand rate from Jan. 1 through May 25. Distillate demand is trailing the year-ago rate for the same timeline by 3.4%. And while gasoline and diesel stocks are at 3-1/2 and 4-year lows, respectively, U.S. commercial crude stocks are at a 22-year high.
The environment is set for a series of price declines at the pump right through the July 4th holiday barring some unknown bullish event as the pass through costs from wholesale to retail runs its course. The current bearish psychology could keep gasoline costs low beyond the next summer holiday. However, the economic weakness could also prompt the US Federal Reserve to launch some type of stimulus action, with this activity in the past bullish for oil prices.
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 16 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.