The Economy Cuts Both Ways on Gasoline

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

Retail gasoline prices continue to decline as a host of bearish issues arise, while talks this week with Iran and the permanent five members of the United Nations Security Council plus Germany offer the prospect of further easing in the likelihood from this year’s greatest threat to global oil supply becoming a reality.

Wholesale gasoline costs have moved sharply lower during the second quarter, taking retail prices down with them, with more downside left for most pump values. The steep decline comes with an unwinding of risk as the market, while watchful, hopes for the best in discussions this week with Iran over its pursuit of a nuclear capability that many in the West believe is a pathway for the Islamic Republic to secure nuclear weapons.

View Telvent DTN’s Weekly and Historical Gasoline Price Index.

A series of sanctions against Iran have reportedly taken a toll on the country, with its oil sales tumbling even as the country stores unsold barrels of oil offshore on tankers. The European Union is set to implement its own sanctions on Iranian oil imports on July 1, while the West continues to plan for less global oil supply. Ahead of this weekend’s Group of Eight meeting in Washington D.C., the United States has already sought coordination for a potential release from emergency oil stores with fellow members of the International Energy Agency similar to what occurred in 2011 with lost OPEC supply due to the Libyan civil war.

The IEA said global oil supply recently moved above the five-year average for the first time since May 2011, another milestone towards alleviating pain at the pump for the American consumer. And as worry over supply security ebbs, concern over the world’s economic growth threatens demand.

The Euro zone’s debt crisis is back at center stage, highlighted by Greece that is quickly moving toward the far left politically, a prospect that threatens previous deals with its would be financial rescuers. Greece has new elections scheduled for June 17 after failing to form a new government, while current leaders in the polls show a party winning that would reject conditions previously accepted by officials of Athens. Greece, which has a debt payment due in June, has said it would exhaust its funds in July.

Spain is feeling the heat from the fiscal discord on the continent and the better than 50% chance that Greece will leave for single euro currency for a fate unknown. There are already reports of runs on banks, and markets are reducing risk by selling off assets, including the noncommercial crowd reducing their long positions in New York Mercantile Exchange oil futures, with a long position taken when the holder believes prices will increase.

Global Impact
Europe’s debt hole is now seen as one of the factors slowing China’s voracious economic engine, although the country is still seen growing robustly. This view has gained currency as recent data details slowing industrial growth by the Asian powerhouse. Meanwhile, the expansion by the US economy continues, albeit at a more sluggish than previously anticipated pace. Slowing economic growth retards demand for fuel.

And so we see the unwinding of length just ahead of Memorial Day—the celebrated start of peak gasoline demand during the warmer summer months leading to lower fuel prices.

AAA projects 34.8 million Americans will travel 50 miles or more from home during the Memorial Day holiday weekend, an increase of 500,000 travelers or 1.2% from the 34.3 million who traveled one year ago, according to a May 16 news release. Of that total, roughly 30.7 million or 88% will drive, up 1.2% from the 30.3 million who drove a year ago for the holiday.

The Memorial Day holiday travel period is defined as Thursday to Monday (5/24-28).

“The overall domestic economic picture continues to improve slightly, however, American consumers faced a new challenge this year as steadily increasing gas prices throughout the spring significantly squeezed many household budgets,” said AAA President and CEO Robert L. Darbelnet. “Americans will still travel during the Memorial Day holiday weekend, but many will compensate for reduced travel budgets by staying closer to home and cutting entertainment dollars.”

While overall US oil consumption is down this year from 2011, gasoline demand is higher according to the American Petroleum Institute, reporting gasoline deliveries in April up 0.9% from year prior at 8.8 million bpd. For the first four months of the year, gasoline demand was up 0.3% compared to a year ago.

“The mixed demand picture reflects an improving but relatively weak economy,” said API Chief Economist John Felmy. “Millions remain out of work. The most recent BLS data showed job growth, but it was less than expected.”

API reported that for both the month and year to date, conventional gasoline demand was up and reformulated gasoline demand was down. Reformulated gasoline is mostly used in urban areas and conventional is used in more rural areas.

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

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