Gasoline Price Advance Arrested, if Only for the Moment

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

A string of successive advances in the US retail gasoline price average reported by the federal government that started in late November ended Jan. 31 with a 0.9 cents decline to $3.101 gallon. The US average, which is for regular grade gasoline and reported by the Energy Information Administration (EIA) weekly on Mondays, is 44 cents higher than at the same time in 2010.

Wholesale gasoline costs mostly fell across the country’s major metropolitan markets, owing to heavy selling on Feb. 4 that reversed what would have been a push higher in wholesale prices. We should see wholesale costs, and, as a result, retail gasoline prices to continue moving lower in February, but there are a host of factors that could upset that expectation.

Firstly, wholesale gasoline costs were set to break lower ahead of the uprising in Egypt, which underpinned a rally in crude oil and gasoline prices in open market trading. Specifically, the New York Mercantile Exchange RBOB (Reformulated Blendstock for Oxygenate Blending) futures contract, the national benchmark price for gasoline, rallied to highs last seen in early October 2008 during the first few days of February.

Oil prices were initially bid higher on worry that the uprising could impact oil deliveries through the Suez Canal and the Sumed Pipeline, which runs alongside the canal. There was also concern that the uprising could spread across North Africa and the Middle East, with the Egyptian protests following Tunisia’s uprising that forced out its president last month.

Oil transit through Egypt continued to flow, with the respected army more than doubling security along the delivery routes. And while Egyptian President Hosni Mubarak has not relinquished control of the country as demanded by anti-government protesters, the intensity of the protests has eased to an extent. On Feb. 4, markets sold off sharply on a rumor that Mubarak had quit the presidency, which was later squelched. Still, many of oil’s buyers during the latest run-up sold positions ahead of the weekend, fearing a market selloff if Mubarak had decided to grant anti-government protestors their demand.

The Egyptian uprising will remain a supporting feature for oil prices until a resolution is reached, adding a geopolitical risk premium. Otherwise, market forces would compel a deeper price decline, with gasoline supply continuing to build in the United States. In fact, the EIA said that domestic gasoline supply reached a nearly 18-year high as of Jan. 28. Additionally, the market will soon be transitioning to summer grade gasoline. While this is more costly to produce because of stricter environmental specifications, which will eventually end up in higher pump prices, suppliers could slash asking prices as they look to selloff winter-grade gasoline.

Another factor that’s continues to limit demand growth is a high unemployment, as there a less workers making the roundtrip between their jobs and home. The Department of Labor said Feb. 4 the unemployment rate had tumbled from 9.4 percent in December to 9% in January that suggests the employment picture is improving. However, only a paltry 36,000 jobs were added to the economy, which is very bearish. The drop in the unemployment rate was due to an annual adjustment that reduced the employment base instead of an improvement in the jobs picture in January.

“It strikes us as a particularly lamentable type of “new math.” It has reached this point after having been changed and changed again by a dozen administrations, each trying to make the employment figures seem better than they really are,” said Peter Beutel, founder and president of Cameron Hanover, a risk management firm for the fuel industry, in a note to clients.

The unemployment picture suggests demand growth for gasoline will remain constrained.

Gasoline prices have increased due primarily to higher crude costs, however. Moreover, while gasoline prices should move lower in February, the trend is for higher pump prices looking ahead even if gasoline demand growth remains sluggish.

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 15 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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