Brian L. Milne, Refined Fuels Editor, Telvent DTN
Wholesale gasoline costs mostly moved higher through the week-ended Monday (8/15) in major metropolitan markets across the U.S., paring steep declines incurred earlier in August amid heavy selling that had gripped markets of all stripes, and reached the panic level at some points.
Macroeconomic signals continue to dominate price guidance for the oil market, with worry that the U.S. economy is at a recessionary cliff’s edge and losing footing while sovereign debt issues in the euro zone spread across the continent threaten an extended period of low fuel demand.
A downward revision in U.S. GDP for the first quarter in late July, to the downgrade of U.S. debt by Standard and Poor’s for the first time in the country’s history were key features in darkening the cloud of gloom over the economy.
Retail sales in July were better-than-expected, helping to ease the worry over a double dip that had only recently been on the radar of many analysts. However, sour consumer confidence, which last month plummeted to its lowest depth in more than 30 years, quickly showed the uphill battle in returning the US economy to a robust growth phase.
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This matters especially to gasoline producers, marketers and retailers because reduced spending by consumers has a direct impact on gasoline demand. Should the consumer feel threatened that he or she is at risk of losing a job, or witnessing erosion in their retirement savings, they will cut back on discretionary spending that has a direct influence on trips made to the local gas station. Additionally, high unemployment, hovering at more than 9% now, historically shows an elevated correlation with weakening demand for gasoline.
From Jan. 1 through Aug. 5, implied gasoline demand was down 0.8% against the comparable period in 2010, while tumbling 3.4% for the four weeks ended Aug. 5 versus the same time span last year, preliminary data from the Energy Information Administration (EIA) shows. This indicates that the demand picture has been worsening in 2011, upending rosier forecasts pushed earlier this year.
Retail gasoline prices will remain under pressures in the coming weeks from the mid-Summer selloff, although the decline in pump prices will stretch out over several weeks while mitigated by recent buying activity.
For instance, consider that New York Mercantile Exchange WTI crude futures, which serves as the U.S. benchmark for crude prices, tumbled $20.29 or 20% in value from July 26 when they settled at $99.59 bbl to Aug. 9 when they tumbled to $79.30 a barrel.
While some of this decline has already been reflected in street prices, much of the downside move is still working through the supply chain. Limiting the price slide will be gains made since Aug. 9, with the crude future contract gaining $6.08 or 7.7% through Aug. 12 with an $85.38 bbl settlement. The market is expected to increase by another $3 to $4 bbl in the near-term to near $88 bbl before the buying stops.
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 firstname.lastname@example.org.