Wholesale Gains to Arrest Retail Fuel Decline

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

Countrywide, wholesale gasoline prices were mixed for the week-ended Monday (6/14), with markets along the West Coast down slightly while increasing elsewhere in the U.S. The higher wholesale costs were triggered by gains in the financially traded oil futures market, with supply in the physical market seen more than ample to satisfy near-term demand requirements.

Financially traded oil markets were pushed higher on renewed optimism that the global economy would continue to improve this year led by the U.S. and Asian economies. The sentiment was enough to assuage fears that euro-zone countries, straddled with debt, would trigger another credit crisis that jumps the Atlantic Ocean to the U.S. impacting domestic Gross Domestic Product. The view was that developing countries in particular would continue the global economic expansion despite slow growth in the EU.

The market remains extraordinarily volatile however, with the sentiment over the global economy and its impact on U.S. demand for oil still in flux. While there is a broadening cadre of investor support that the economic recovery is sustainable, worries abound over the fragility of the expansion, which has triggered steep sell-offs.

That uncertainty prompted the Energy Information Administration (EIA), which is the statistical arm of the Department of Energy, to revise lower expectations for crude oil retail gasoline prices this year.

In its most recent monthly short-term Energy Outlook, the EIA downwardly revised its price projection for crude oil by $3 for this year and in 2011, projecting the US benchmark crude price will average $79 barrel in 2010 and $83 barrel next year.

The downgrades were more severe for retail gasoline prices, with the EIA adjusting down by 15 cents to $2.79 gallon its expectations for what regular grade gasoline will average nationally during this summer driving season, which runs from April 1 through Sept. 30. For all of 2010, EIA pegs a $2.76 gallon US average retail gasoline price which increases to $2.92 gallon in 2011, down 10 cents and 6 cents, respectively, from where the federal agency had set estimates in May.

As of June 7, the EIA said the U.S. average retail regular grade gasoline average was $2.725 gallon.

View DTN’s Weekly and Historical Fuel Price Index. 

Drilling Ban
Price forecasting is extremely difficult and subject to frequent revisions. More are likely as the summer unfolds, especially when considering the growing catastrophe in the Gulf of Mexico.

A six-month ban on drilling in the deep waters of the Gulf put in place on May 27 is already supporting higher crude prices in far dated futures contracts, which are seen pulling nearby delivery prices higher. The concern is not just that the moratorium is deferring crude production deeper into the future, with little to no impact on actual lost production expected in 2010, but on longer-term implications due to the massive oil spill. 

Some fear outright bans on oil drilling, but the more likely outcome is restrictions on where companies can drill, higher costs due to increased regulation over operations and higher liability caps.

All of this would limit the amount of oil that the U.S. would be able to recover, while making what is recovered more costly to produce. Already, the long-term trend for oil was pointed higher, with the question being when this upside slope would begin.

Currently, there is an abundant supply of oil, gasoline and diesel fuel in storage, including supply held on tankers anchored in the Gulf and elsewhere around the globe.

However, expectations are that demand will increase, with the International Energy Agency in early June revising higher their expectations on global demand. Near-term, the supply surplus will cap the price upside but the bias remains pointed up. 

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 brian.milne@telventdtn.com.

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