Pain at the Pump

By Brian L. Milne, Refined Fuels Editor for DTN

 

The US average for regular grade gasoline was last reported by the government at $2.524 gallon, with the price to advance from there. The national average increased 9 cents during the last week of May, and 47 cents or 23% since the end of April. And many metropolitan markets across the country, namely in the Midwest and in California, are seeing much higher retail prices while the advance was even quicker.

 

Gasoline prices have outpaced most market expectations from recent months, and are moving to the upper extremes of short-term forecasted ranges.

 

Spiking values over the past few weeks have been driven by optimism that the economic recession is nearing or already has ended and a rebound will quickly follow. That view includes a belief that demand for energy will climb, while supply will tighten after many investments to expand production all along the supply chain were put on hold or canceled due to tumbling crude oil prices and the recession.

 

This market sentiment, which is growing in appeal, pushes buying in energy financial contracts such as futures and options. When that buying pushes prices to new highs, even higher “technical” price targets are hit, triggering more buying and prices climb.

 

Technical trading sparked by optimism over the economy has the momentum, overshadowing bearish fundamental factors such as abundant oil supply and lower demand. The current rally on the financial side could be topping now as bearish fundamentals exert price pressure.

 

But, there is potential for prices to move even higher from current range deeper into June.

 

For drivers in the wider Chicago-Milwaukee-Detroit-Cleveland-Indianapolis markets, an extended rally in the financial energy contracts would amplify existing pain at the pump. This broad area in the upper Midwest is short gasoline supply, and inventory levels are so low that new supply piped into the region is quickly dispersed. This market region, where demand is outstripping supply, will continue to see gasoline prices move higher throughout June-possibly past July 4th-with or without an accompanying increase in financially traded gasoline contracts.

 

Retail gasoline prices in the upper Midwest could do what was unthinkable just a few short months ago-top $3 gallon. California and the Pacific Northwest would join the $3 gallon gasoline club too if the financial energy contracts continue their ascent.

 

View DTN’s Weekly and Historical Gas Prices

 

But drivers in San Francisco might take consolation that their recent rapid price surge is slowing compared with Los Angles. Retail gasoline prices are still climbing in the Bay, just not as fast as in the City of Angels.

 

 

About the author

Brian L. Milne is the Refined Fuels Editor for DTN-a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for nearly 14 years as an analyst, journalist and editor. He can be reached at brian.milne@dtn.com.

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