By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Retail gasoline prices slid to a two-and-a-half month low ahead of the Memorial Day holiday, which has been dubbed the unofficial kickoff to the summer driving season due to the increase in holiday travel. Pre-holiday estimates projected a nearly 6% increase in highway travel during the Memorial Day weekend compared against 2009.
As of May 24, the Energy Information Administration said regular grade gasoline averaged $2.786 gallon nationally, sliding 11.9 cents from a $2.905 gallon nearly 19-month high two weeks prior on May 10. The decline in pump prices has been far slower than the decrease in wholesale values, which tumbled nearly 40 cents or 16% in May.
There’s always a lag in passing through savings from the wholesale market to retail, which could take several weeks for the full price impact to work its way to local outlets. Moreover, the full decline in wholesale costs won’t filter down to the pumps.
There is less volatility in price changes at the retail outlet compared with wild price swings in the wholesale markets, which helps to explain why the full loss in wholesale prices won’t be reflected in retail. Plus, summer gasoline costs more to produce than winter grades because of stiffer environmental regulations employed during hot weather conditions to reduce fuel volatility and emission release into the atmosphere.
Volatility continues to have a major impact on the oil market, with May reversing from a very bullish sentiment to bearish. The primary driver in the reversal was a view that the global economic recovery would slow due to European debt woes, while the market had been pricing in higher values linked to expectations for a robust pace in global economic expansion. Expanding economies use more fuel, so economic growth is linked to higher demand for oil and its byproducts such as gasoline.
The market was overbought too, meaning that too many investors and speculators in oil held the same position, pushing prices in the wholesale gasoline market to a near 19-month high to start May. Prices tumbled as the market sold off these positions. The market looks to have stabilized during the last week of May, and the wholesale gasoline market is again heading higher.
Supporting the price upturn in the wholesale market was expectations that the global economic recovery would continue despite slowed growth in the euro-zone, driven by Asian economies and the U.S. Additionally, the oil spill in the Gulf of Mexico has triggered a moratorium on deepwater drilling off the U.S. shores, with 33 wells in development suspended.
There is a concern that deepwater drilling off the U.S. could be banned for an extended period of time, reducing the expected amount of recoverable oil that had been counted on. Lastly, the National Oceanic and Atmospheric Association forecasted a very busy hurricane season in the Atlantic Basin, with a hurricane in the Gulf of Mexico potentially disrupting offshore oil production, shipping lanes for imports and oil refining. The hurricane season runs from June 1 through November 30, with the forecast adding a risk premium to oil prices.
Longer-term, the price outlook points higher because of these factors. In the near-term, prices will remain choppy which will limit the pass through savings in the wholesale market from May in reaching gasoline outlets in June. During the first week of June, retail prices will be mixed nationally while the U.S. average should see limited change, holding near the 2-1/2 month low.
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 more than 14 years as an analyst, journalist and editor. He can be reached at firstname.lastname@example.org.