By Brian L. Milne, Refined Fuels Editor, Telvent DTN
Bucking the seasonal trend, retail gasoline prices are moving higher in early October following sharp increases in wholesale costs in a host of major metropolitan markets around the United States. Retail gasoline prices have averaged higher nationally in October compared with September in only two of the last seven years.
A combination of factors merged to trigger a rally in wholesale fuel costs, offsetting lower ethanol prices.
We ended September with wholesale spot prices for ethanol, a federally mandated fuel extender found in gasoline typically at a 10% content level coast-to-coast, sliding from two-year highs on easing demand and lower corn prices. Corn is the primary feedstock in producing ethanol in the U.S., so its value has a direct impact on ethanol prices. Ethanol prices had moved to a premium to gasoline in September, which supported higher wholesale costs for gasoline, but have since returned to a discount.
According to the Energy Information Administration’s final release of the third quarter, fuel in inventory in the US posted steep draw downs, while demand surged, catching the market by surprise. While supply remains well above historical averages, the unexpectedly large weekly decline in stored product combined with a robust reading on demand triggered a rally in New York Mercantile Exchange oil futures through the end of September into early October amid expectations for this trend to continue.
Regionally, tightening supply conditions for gasoline were also reported in the Chicago and New York markets, beefing up spot physical prices. Chicago spot gasoline prices were very volatile in September; soaring to a four-month high mid-month on a key pipeline outage before selling off, but again rallied to end the month. Meanwhile, a refinery in New Jersey that supports the New York regional market has cut production amid extended maintenance, rallying the region’s gasoline prices to two-month highs.
The major force driving most values higher nationally however was an improving view for the US economy, whether seen through better macroeconomic data or intervention by the Federal Reserve.
An improvement in weekly unemployment data coupled with an increase in consumer spending-the fifth straight, along with a 0.1% revision higher in second quarter Gross Domestic Product to 1.7% offered psychological support for those bullish on the market. Growth in manufacturing data for China also drove market sentiment, while offsetting a dip in US manufacturing activity, which still shows growth.
The key catalyst was however the ongoing weakness in the US dollar, which supports higher prices for commodities like crude oil and its byproducts. The greenback weakened to a six-month low against the euro late last week while gold rallied on increasing expectations for intervention from the Federal Reserve. The Fed is expected to expand its quantitative easing efforts, which means looser monetary policy, whether through expanding its purchases of debt or printing more currency. The overnight lending rate between banks is already stuck at an historical low near zero, prompting a creative response by the Fed.
Currency trading is extremely volatile, so we could see a reversal in the U.S. dollar’s value. However, the trend for the greenback is pointed down amid expectations for a higher US deficit. The weaker greenback diminishes the buying power of domestic fuel suppliers, forcing crude prices higher. This will, in turn, lift gasoline prices higher nationally.
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.