Highlighting Weak Demand, EIA Lowers Price Expectations

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

The Energy Information Administration (EIA) chopped 19 cents off the previous average it expected for U.S. gasoline prices this summer to a new $3.60 gallon estimate, while anticipating this year’s average for regular grade gasoline at $3.56 gallon and $3.51 gallon in 2013. That compares with a 2011 retail average price for regular grade gasoline at $3.53 gallon.

Tumbling crude prices from highs seen earlier this year along with weak domestic demand for gasoline have exerted pressure on pump prices. Driving the decline is an increasing supply of oil globally, including a sharp increase in US production. The International Energy Agency reports global supply again above the five-year average after inventory levels fell below that level from May 2011 through March.

View Telven DTN’s Weekly and Historical Fuel Price Index.

The greater impact to oil prices has been slowing economic growth globally and here in the U.S., while the outlook is uncertain. This has a great deal to do with Europe, with policy makers across the Atlantic unable to forge a compact the market believes would address the debt issues of several countries within the euro zone.

Forecasters through this cloud of economic uncertainty present both better and worsening conditions, and do so rather convincingly. Some analysts envision a global economic contraction as the euro zone problems spillover, affecting the economies of countries such as China and the U.S., the world’s largest two economies. This drags down fuel demand.

The other perspective cobbles together a belief that the U.S. is mostly insulated from a euro zone contagion, while the economy here is in much better position than it was during the Great Recession from 2007 through to 2009. There are also expectations for more intervention by central bankers, as they take stops to stimulate the economy through monetary policy amid the void of effective redress by elected officials.

On the latter view, we could see action by the Federal Reserve as early as Wednesday (6/19) when the Federal Open Market Committee ends a two-day meeting and Chairman Ben Bernanke holds a press conference. Past efforts by the Fed to stimulate the economy has had the side effect of weakening the US dollar and rallying equities and commodities.

While unclear if crude prices will take another leg down or if a bottom was installed what is expected is a further decline in the EIA’s U.S. gasoline average, which has tumbled for ten consecutive weeks through June 11 so far to $3.572 gallon. Since reaching a $3.941 gallon high on April 2, the average has tumbled 36.9 cents or 9.1%, and is 14.1 cents less than a year ago.

Lower pass through costs are still working their way through the supply chain, although wholesale gasoline costs were mixed in the latest weekly tabulation. After surging earlier this month, Midwest wholesale prices freefell, pressured by the restart of a regional refinery affecting the Chicago spot market, while a large batch of product from the Gulf Coast was reported nearing their end location in the Midwest.

Wholesale gasoline costs along the West Coast continued a decline as the region sees a rebuild in gasoline supply. A string of shutdowns highlighted by a more than three-month outage at BP’s Cherry Point refinery in Washington State had drained supply and spiked prices in May into early June.

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 brian.milne@telventdtn.com.

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