Pump Prices to Extend Higher in Early August

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

 

Gasoline prices will move higher in early August at retail outlets across the country’s major metropolitan regions as pass-through costs from the wholesale markets make their way towards the pumps. Prices are moving higher despite ample supply of gasoline while demand remains down year-to-date against 2008, albeit preliminary data suggests a higher consumption rate for gasoline in July compared with the same period last year when retail prices were at all-time record highs.

 

The rise in wholesale costs slowed during the final week of July after double-digit gains nationwide week prior, which should dampen the upside advance in pump prices early this week. However, a smaller-than-expected contraction in the U.S. economy during the second quarter reported on July 31 has heightened anticipation that recession is nearing an end.

 

U.S. GDP shrunk 1% in the second quarter compared with estimates of a 1.5% loss, which triggered optimism by investors that the economy is getting ready to again grow. Included in the report were revisions to previous data, which showed that the U.S. economy contracted much more than initially expected in the first quarter and the fourth quarter of 2008.

 

Demand Down

Shrinking economies use less energy, which is illustrated in data for diesel fuel which shows demand is down considerably in 2009. In the U.S., diesel is primarily used by the industrial and commercial sectors, and, as a result of recession, demand for the fuel tumbled as activity for construction, manufacturing and interstate commerce grounded to a halt.

 

Gasoline demand is aligned with personal disposable income. Spiking retail gasoline prices leading up to and during the summer of 2008 triggered conservation by American drivers then, while a climbing unemployment rate dents demand on reduced commuting and shaken consumer confidence. Gasoline demand remains tepid despite a higher consumption rate this summer than in 2008, but demand in 2008 was down 3.5% compared with 2007.

 

View DTN’s Weekly and Historical Gas Prices.

 

Oil refiners continue to adjust to lower demand by throttling back gasoline production, looking to drain supply from inventory. This response by industry could limit the potential downside in prices that are suggested by supply-demand data.

 

Key to knowing where prices are headed next is investor sentiment. Commodities continue to remain a location for a large influx of investment revenue, which pushes prices higher. Additionally, a weaker U.S. dollar, which started August at a better than 10-month low against the euro, bolsters the value of crude oil, gasoline and diesel. This combination has the ability to overrule a very bearish slate of supply-demand data near term. Seasonally however, gasoline prices typically head lower as the summer driving season comes to a close.

 

 

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 nearly 14 years as an analyst, journalist and editor. He can be reached at brian.milne@dtn.com.

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