U.S. Retail Gasoline Average 5% Shy of 2012 High

Brian L. Milne, Energy Editor, Schneider Electric

As February nears an end, retail gasoline prices are already at highs one would expect when the weather warms, not when some parts of the country are still digging out of snow drifts. A recent double-digit jump in the retail average reported by the Energy Information Administration means gasoline prices are just 5% short of reaching the $3.941 gallon 2012 high established in early April.

The latest EIA price update through Feb. 18 shows nine consecutive weekly increases in their US average for all formulation of regular grade gasoline sold at retail outlets nationally, surging 49.3cts or 15.2% since the middle of December when it plumbed the 2012 low at $3.254 gallon. Of that advance, 39cts or 11.6% of the increase occurred since late January, 13.6cts during the week through Presidents’ Day alone.

Several parts of the country, primarily the West Coast and major metropolitan regions along the East Coast, are already experiencing pump prices above $4 gallon. The seemingly unrelenting push higher makes a national average above the psychological $4 benchmark appear all that much closer, with the EIA average hurdling the price point only once in its history for a period of seven weeks from early June to late July 2008.

View Schneider Electric’s Weekly and Historical Gasoline Price Index.

The spike in wholesale gasoline prices reflected by the New York Mercantile Exchange RBOB (Reformulated Blendstock for Oxygenate Blending) futures contract has hit headwinds however, and should slow the advance. The nearest delivered contract fell 5.49cts gallon last week, trading in a wide 19.09cts range, and wholesale costs in several markets are already declining. As of this writing, the contract is trading midway through that range, recovering from the low.

A selloff by NYMEX RBOB futures was sparked by several market features, including a technically overbought market. Accelerating the downside were comments revealed in the minutes of the Federal Open Market Committee’s late January meeting in which some officials raised concern over the Federal Reserve’s $85 billion per month bond buying program. Their concern suggested the Fed might end the bond buying program, a form of quantitative easing aimed at stimulating economic activity, earlier than previously expected. The potential loss of the stimuli triggered sharp losses on worry of slowed economic activity.

Even with a return to the downside by the NYMEX RBOB contract, there are still price increases moving through the supply chain waiting to get passed through to retail, so we should expect EIA’s national average to continue higher near term. But, could the upside be coming to an end?

The sharp advance in gasoline prices comes in what is known as a preseason rally, when prices climb ahead of expected peak demand as the weather warms. Last year NYMEX RBOB futures with nearest delivery posted its annual high during the first week in March, with the high in retail prices realized one month later. In 2011, the annual high was achieved during the first week in April, and in early May in 2010, early June in 2009 while the record high for 2008 was posted in July. What typically follows the highs is a steep selloff, with higher retail prices having a dampening effect on demand.

The quick jump in the retail average has brought a slew of headlines in the mass media market, with some analysts worrying the knock-on effect high gasoline prices will have on consumer spending, which makes up a large share of the US economy. Climbing gasoline prices come following the 2% hike in the payroll tax lawmakers dropped on the American consumer at the start of the year, while government spending cuts in what is known as the sequester are set to begin on March 1. A slowing economy typically reduces demand for fuel.

While uncertainties abound, the March RBOB futures expires on Feb. 28, with the April contract to take over as nearby delivery after the March contract rolls off the board. April delivery is trading at a nearly 20cts premium to the March contract, with RBOB futures forward curve flipping into backwardation with the rollover—a bullish market feature in which the nearest delivered contract trades at a premium to deferred delivery. So maybe the retail price advance for gasoline might still challenge the 2012 high, and, quite possibly, $4 gallon.

About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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