More Upside for Retail Gasoline Prices

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

Retail gasoline prices in the U.S. will continue to increase early this week, maintaining the trend seen this month, after wholesale costs jumped more than a dime nationally during the third full week of July.

The string of price declines seen during the second quarter reversed to the upside in July, as supply concerns emerged amid the intensifying conflict in Syria and, more directly, to combative talk from Iran.

Tough existing and new US sanctions against Iranian business activity joined by a European Union embargo on Iranian oil are reportedly having a major effect on Iran’s oil production and exports. Barclays Capital said earlier this month that oil production by the OPEC member is at a 20-year low while exports have been cut in half from recent levels to roughly one million bpd.

The sanctions are aimed at stopping Iran’s efforts from seeking a nuclear capacity, with many Western nations believing Tehran is attempting to develop a nuclear weapon. Iran denies the allegations.

The most important oil supply threat, AAA said, is from the Middle East, as global powers try to force Iran to cease its nuclear program.

Iran has again threatened to close the Strait of Hormuz, a key shipping lane where 20% of the oil consumed globally passes through, while the country is being linked to terrorist activities. Israel last week laid blame for an attack on Israeli vacationers in Bulgaria at the feet of Hezbollah that it says was backed by Iran.

Meanwhile, Iran’s only country ally in the Middle East, Syria, is engulfed in a growing conflict. The inner circle of Bashar Hafez al-Assad, Syria’s authoritarian leader since becoming the country’s president in 2000, has been breached with the killing of three leaders last week. The Assad regime is not expected to last, and there is worry a prolonged conflict could break Syria into multiple regions, and that violence spills over into other countries in the Middle East.

“The gas price low of $3.33 per gallon at the end of June could very well have been the bottom for the summer driving season,” said Jana L. Tidwell, public affairs specialist for AAA Mid-Atlantic. “Analysts believe that as the summer vacation travel ramps up into August, gas prices are likely to remain in the $3.30 to $3.50 per gallon range from now through Labor Day, barring any unforeseen supply disruption such as a hurricane or international geopolitical conflict.”

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

Growth Concerns
While feared supply disruptions had rallied oil prices this month, this week worry over economic growth triggered a sharp selloff. The euro zone debt crisis has again moved to the front and center of concern for oil traders, as finance leaders visit Greece this week to see if they qualify for more rescue funds, which Athens must have to avoid default. The borrowing rates for Spain and Italy continue to rise to levels seen as unsustainable, prompting worry that those two countries will seek a rescue package. So far, Greece, Ireland and Portugal have all sought and received bailout funding.

The weakening economic growth in the euro zone is seen dampening the US and Chinese economies, the world’s two largest economies, with China recently reporting its slowest growth rate in three years for the second quarter at 7.6%. The Federal Open Market Committee continues to revise lower its expectations for US economic growth this year and for 2013.

“A weakening economy requires less fuel, and this by most measures is a weakening economy,” said API Chief Economist John Felmy. “The fall in demand in June is particularly notable and consistent with other disappointing metrics in the economy, including falling retail sales and contraction in the manufacturing sector.”

Felmy made those comments on July 20 in announcing monthly statistical results, which showed total petroleum deliveries, a measure of demand, dropped 3.0% from a year ago to 18.691 million bpd in June while falling 2.6% for the first six months of the year compared with the same period in 2011.

Gasoline demand tracked the overall decline, sliding 2.5% for June versus a year ago and 1.0% for the first six months of this year against the same period in 2011. The API data showed demand for June at 8.821 million bpd and at 8.648 million bpd for the first half of the year

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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