Fuel Trending Upward

By Brian L. Milne, Refined Fuels Editor for DTN

Wholesale gasoline prices ended the most recent week mixed which will lead to flattening if not lower retail prices in some metropolitan markets, halting a steady march higher so far in 2009.

The price decline was diverse, occurring in several wholesale markets in the Midwest to the Rocky Mountains as well as along the East Coast and Southeast to Texas. West Coast metropolitan markets were slightly mixed, but mostly higher.

The price drop in the wholesale markets does not guarantee a decline in pump prices at local stations that they serve however. There are many dynamics, often referred to as moving parts, that are found in the fuel distribution chain that might seem perplexing to some but they do drive the price direction. So too, can local supply issues have a unique impact on one market compared with a neighboring location.

So, in some retail markets, such as Los Angeles or in Ohio, where wholesale gasoline prices have increased rapidly, their recent decline might serve only to freeze pump prices rather than lower them. The reason is because retailers typically do not tack on the full price increase their absorbing from the wholesale markets, more gradually adding this to pump prices.

Essentially, they’re holding back some of the pass through costs, and would look to freeze their pump prices as they play catch up when wholesale prices decline. Of course, the timeframe in which the full rate of pass through costs reaches retail outlets has been a moving target, certainly reduced from the eight-week period government studies showed five years or so ago.

Trending Higher
As we have been saying, the overall trend for retail gasoline prices is higher. Overall gasoline production in the U.S. is lower compared to historical averages as refiners look to match their output with demand and due to seasonal maintenance at refineries.

Meanwhile, recent government data shows gasoline demand has been increasing early this year against the comparable period in 2008.

Nationally, the U.S. average price for regular grade gasoline is $1.926 gallon, near the $1.95 the government expects it to average for all of 2009.

Short-term, expect the average to climb above $2 gallon, and could reach $2.50 gallon by May. So, what we should expect to see is a rolling stop in the steady increase in retail prices, not a full brake to the higher price trend.

About the Author
Brian L. Milne is the Refined Fuels Editor for DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for nearly 14 years as an analyst, journalist and editor. He can be reached at brian.milne@dtn.com.


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