Fed’s Stimulus Jolt to Underpin Retail Gasoline Prices

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

After 10 weeks with an advance the U.S. retail gasoline price average should decline, which would make it the first decrease in the national average since June. During its staircase rise, the Energy Information Administration’s weekly average has surged 49.1cts or 14.6% to a $3.847 gallon 4-1/2 month high, gaining at a 4.9 cents per week pace.

The summer advance through Labor Day is atypical, with gasoline prices usually peaking in late spring in anticipation of higher summer demand, changing fuel specifications and refinery maintenance. Historically, retail gasoline prices would then slide past Labor Day as summer vacations come to an end cutting into consumption while refiners switch to a less costly to produce winter-grade gasoline.

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

This summer, a series of unplanned refinery outages, with several of those outages at large refineries that had an outsized effect on regional supplies, pipeline outages, and climbing crude costs converged to defy the accustomed to price decline. Instead, gasoline inventories were drawn down, now holding near a four-year low, and crude prices rallied from June lows on heavy maintenance in the North Sea and primarily on a market view that governments in Europe, China and the U.S. would introduce economic stimulus policy while, in the case of Europe, authorities would take measures to shore up an ailing euro zone. Hurricane Isaac in late August added another upside push for gasoline prices, with several refineries briefly shut or operating at reduced capacity because of the effects of the storm.

The EIA’s U.S. average nudged up a marginal 0.4 cents for the week-ended Sept. 10, and wholesale gasoline costs through Sept. 15 were mostly lower in major metropolitan markets nationwide, setting up the potential for a break in the upward price streak. The RBOB (reformulated blendstock for oxygenate blending) gasoline futures contract that trades on the New York Mercantile Exchange did slide to a five-week low on Sept. 13, pressured by returning refinery operations that signaled a resumption of higher gasoline output just as gasoline demand wanes from the summer.

However, the trend for the oil complex is up, with NYMEX crude futures topping $100 per barrel briefly on Sept. 14 for the first time since the start of May, rallying on an announced plan to stimulate the economy through a third round of quantitative easing announced by the Federal Reserve on Sept. 13 and a surge of anti-American protests across the Islamic world the heightened the geopolitical risk premium incorporated into global oil prices.

Economic Growth
During its two-day Federal Open Market Committee meeting, the central bank announced on Sept. 13 its most aggressive plan yet to combat sluggish economic growth and especially persistently high unemployment that sent the U.S. dollar spiraling to a 4-1/2 month low while gold and oil prices rallied. The Fed plan, which includes aggressive buying in mortgage backed securities, would expand its balance sheet that, in turn, weakens the dollar.

A weaker dollar means more are required to buy the same barrel of oil in the U.S., while investors also look to purchase hard assets to counteract weakening purchasing power from a softer greenback otherwise known as inflation.

A YouTube video made in the U.S. that denigrates the Prophet Muhammad and the Islamic religion triggered a wave of demonstrations against the U.S. from North Africa through the Middle East to central Asia, including the killing of four Americans in Benghazi, Libya, one of which was a well-respected U.S. ambassador. Concern now is if the protests continue and violence against U.S. and other western nations increases, which could affect oil supply from North African and the Middle East.

Meanwhile, the situation in Iran remains provocative, with the OPEC nation enduring sanctions against its oil exports over its nuclear development efforts even as it sees expanded influence of its power in Iraq and Syria. Israeli Prime Minister Benjamin Netanyahu chided western nations, namely U.S. President Barak Obama, for their unwillingness to “draw a red line” for Iran, showing its resolve in not allowing Tehran to secure a nuclear weapon. There is speculation that Israel would attack Iran to slow or stop its nuclear progress ahead of November’s US presidential election should it feel the US is unwilling to take a stronger approach beyond sanctions at stopping what Netanyahu has called an existential threat to Israel.

On the bearish side, gasoline demand should decline from already weak summer levels, with the EIA showing implied demand in 2012 through early September down 4.1% compared with the corresponding time period in 2011. Also, the higher gasoline prices go the likelihood of a release of oil from emergency supply in the U.S. Strategic Petroleum Reserve increases. There is no shortage of oil in the U.S., but political considerations appear to be the driving force for tapping into the SPR, especially considering the upcoming presidential elections.

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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