Seasonal Gasoline Shift and the Bernanke Put

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

The uptrend in retail gasoline prices that began at the start of July still has legs, set to advance even as the summer travel season in the U.S. comes to an end with Labor Day, and as fuel specifications for gasoline ease to lower the production cost.

The Energy Information Administration (EIA) last reported on Aug. 27 the national average for regular grade gasoline sold at retail outlets at $3.776 gallon, up 42 cents or 12.5% since July 2. We are nearing the point in which the string of consecutive weekly increases in the national average, currently at eight, ends, but we are not there yet.

A late August rally for gasoline futures sparked primarily by Hurricane Isaac added to wholesale gasoline costs that have not yet been passed through to retail outlets should continue to push up pump prices. Consider a rally by the now expired September New York Mercantile Exchange RBOB (reformulated blendstock for oxygenate blending) futures contract, which is used to index gasoline grades in the spot physical market, rallied to a $3.2050 gallon four-month high on the spot continuation chart on Aug. 27. Post Labor Day, October futures replaced the September contract as nearest delivery and traded to a $2.9538 gallon one-month low.

The steep decline reflects both the passing of Hurricane Isaac, and the seasonal transition to lower demand and easing fuel specifications. This transition will gradually reduce the prices at the pump paid by American drivers once the higher wholesale costs are fully absorbed. And for critics that constantly link higher gasoline prices to gouging, consider crude costs have rallied 20% or more since early July that would imply another 25cts price gain for the national retail gasoline price average.

Hurricane Isaac has caused some disruption to the gasoline supply chain, with power outages and flooding affecting a half a dozen refineries in Louisiana. Some of these units were restarting in front of Labor Day. Isaac also forced shut come pipelines carrying crude oil that have limited operations at some refineries, including Marathon Petroleum Co.’s Garyville refinery in La. MPC requested and received one million bbl of crude oil from the Department of Energy which it will need to pay back within three months. The oil was sourced from the Strategic Petroleum Reserve.

A potential obstacle to lower retail gasoline prices is a broad-based rally by NYMEX oil futures on monetary easing policy strongly hinted at by Federal Reserve Chairman Ben Bernanke during a highly anticipated speech at Jackson Hole, Wyoming, on Aug. 31. The head central banker focused on uncertainty and risk for a sluggish US economy and persistently high unemployment, where the situation is “grave.”

The Federal Open Market Committee, which sets interest rates and monetary policy and led by the Fed chairman, meets on Sept. 11-12. Should a third round of quantitative easing being announced at that meeting we could see oil and gasoline prices surge higher. This reaction to monetary policy is somewhat reminiscent of what was once the “Greenspan Put,” named after the former Fed chairman.

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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