By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Just below $2.70 gallon, the U.S. average for regular grade gasoline entered November at a one-year high following five consecutive weekly increases according to the federal government. That unrelenting march higher early in the fourth quarter looks to be coming to an end.
Moreover, retail gasoline prices may very well have reached their highs for 2009.
Across the country, wholesale gasoline costs declined during the first full week of November, with the lower costs gradually working their way through the supply chain to retail outlets. In some parts of the country, such as states along the Atlantic and Pacific coastlines, savings at the pump will be minimal, while consumers in the upper Midwest should see a steady and larger drop in their retail gasoline costs.
The overall decline in wholesale costs was led by sliding oil futures as market participants considered that economic recovery might take longer than previously thought, limiting fuel demand. In the upper Midwest, the region is swimming in supply, with wholesale costs also dropping as regional oil refiners cut their asking prices to move out product.
There’s a saying that the oil market has many moving parts, which means there are a number of varying influences that can and do impact price. In 2009, the markets grew tired of focusing on surplus supply levels, and instead turned to indicators that might foretell future demand. The stock market offered a good barometer for this insight many concluded, so oil prices rallied in kind with equities.
Rising unemployment gave pause to that correlation, with a jobless recovery being talked now. Indeed, some analysts expect the unemployment rate, which vaulted 10% for the first time since 1983 in October at 10.2%, to continue climbing, with a peak not anticipated until February 2010.
History has shown that gasoline demand has been negatively impacted by both high retail prices and climbing unemployment. Both of those conditions exist now, with the jump above 10% unemployment also having a bearish psychological impact.
Not only is commuting to and from work reduced when unemployment climbs, so does consumer confidence. There are a number of signs suggesting that consumers will remain frugal a bit longer, including their attempts in limiting trips to the gas station, which would dampen demand.
Almost always there are caveats to oil price expectations. In the fourth quarter, a key factor will continue to be the health of the U.S. dollar against international currencies, which is again weakening after strengthening somewhat during the first week of November.
If the dollar continues to weaken, that sets the stage for crude oil to continue climbing, possibly adding another $10 per barrel before the end of year, equating to a roughly 20-25 cents gain per gallon in gasoline prices.
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 firstname.lastname@example.org.