Gasoline’s Retail Price Slide Could Stall On Shut-ins, Policy

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

The U.S. fell for the 13th consecutive week through July 2 and, at $3.356 gallon, are at a six-month low. So, just as one of the busiest travel periods in the US was underway during the July 4th holiday, retail gasoline prices were averaging at their second lowest price point in 2012 while 22.3 cents below the comparable year-ago average.

The EIA’s weekly average posted a 2012 high on April 2 at $3.941 gallon. Since then, the average has tumbled 58.5 cents or 14.8%.

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

Pressuring gasoline prices has been weak demand. Preliminary data from the EIA shows gasoline supplied to market, a proxy for demand, during the first six months of 2012 down 5.0% against the comparable year-ago period.

There have been a host of reasons assigned for the weak demand, including an older US population that drives less and a more energy conscious society following the 2008 price spikes that actively reduces fuel consumption with higher efficiency vehicles while also cutting down on their time on the road. The early year surge in oil prices that pushed up retail gasoline prices is another factor that cut into demand.

High unemployment amid a prolonged sluggish US economy continues to be the leading feature reducing gasoline demand. The Labor Department reported on July 6 that a paltry 80,000 new jobs were created in June while the national jobless rate held flat at 8.2%. It was the third consecutive monthly report that showed small increases in job creation, which does not bode well for the economy looking forward or for a ramp up in the gasoline consumption rate.

Nonetheless, we should see the downturn in retail gasoline prices end following higher wholesale costs through much of the country, with the nearest delivered RBOB (Reformulated Blendstock for Oxygenate Blending) futures contract rallying to a five-week high on July 5.

The upturn came with a combination of supportive government action or planned policy, including the decision by euro zone leaders to knit a closer alliance after Germany relented on a pledge to not integrate as far as now planned. Also, several central banks, including China’s, cut interest rates to spur economic activity through lower borrowing costs. It was China’s second announced cut within a month.

Analysts still point to slowing economic growth globally that would limit fuel demand and hold down prices. There are concerns over supply however that are providing upside price support in early July.

A strike by Norwegian oil workers that could evolve into a potential lockout could shut-in a sizeable quantity of oil production from the North Sea, driving up Brent crude oil prices that are used globally as a price marker. The strike and possible lockout comes as the European Union and the US have an embargo on Iranian oil, with the OPEC member renewing its threat to close the Strait of Hormuz—a key shipping lane where 20% of the oil consumed globally in 2011 passed through.

A potential game changer that could push oil prices sharply higher is action by the Federal Reserve to again ease monetary policy. Analysts are mixed on what action the US central bank might take and what knock-on effect it would have on oil prices, with past monetary easing efforts by the Fed causing oil prices to rally. Where consensus is found is the timing, with many analysts saying that the Fed would need to act soon so it is not seen interfering in November’s presidential election.

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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