Tumble Time for Gas Prices?

Published in CSP Daily News

Falling crude, demand signal lower fuel prices

NEW YORK-- The falling price of crude oil this month and signs of falling fuel demand point to lower U.S. gasoline prices ahead, though consumers will have to wait for savings to trickle down to the pump, reported The Wall Street Journal.

After reaching an almost three-year high of $3.97 a gallon in early May, U.S. retail gasoline prices have fallen nearly 30 cents on a combination of lower oil prices and flagging sales in the important summer-driving season (see related Lundberg Survey story in this issue of CSP Daily News).

The latest [image-nocss] step down in oil futures suggests more relief is on the way. Crude futures settled 34 cents lower at $85.38 a barrel Friday on the New York Mercantile Exchange. Oil is down 10% in August, at one point last week falling as low as $75.71 a barrel, the lowest price in almost a year.

The cost of oil is the biggest driver of gasoline prices, but it can take several weeks for a decline in oil prices to work its way through the system and become reflected in retail sales. After oil prices tumbled 15% in the first week of May, it took nearly two weeks for retail prices to drop by 10 cents a gallon.

Over the next month, as oil futures held near $100 a barrel, pump prices per gallon continued to drop by another 25 cents. In early July, prices briefly rose before again turning lower.

Retail gasoline prices tend to fall slower than they rise as gas stations try to hold onto better profit margins, John Zehler, president of Virginia Fuels Inc., a gasoline and distillate wholesaler, told the newspaper. "In a downward market, your retailers are not going to be willing to come down as fast."

Still, the slump in gasoline demand has been accompanied by flagging growth and worries about a second recession, said the report. Concerns about the weakening economy have made further declines more likely, analysts said. With unemployment stuck above 9%, families have less in their budgets for vacations and fewer drivers are commuting to work. That is putting additional pressure on gas stations to retain customers.

"Historically, you see a direct connection with high unemployment and gasoline demand, and I think it has being reflected in this fear that we could be sliding into another recession," Brian Milne, refined fuels editor at Telvent DTN, told the Journal. "That's going to force consumers to spend less."

U.S. summer gasoline demand is expected to fall 2.1% this year, the U.S. Energy Information Administration said in its monthly report last week, revising its earlier forecast calling for a 0.5% increase. The statistical wing of the Department of Energy placed the blame on elevated retail prices earlier this summer and a weak economy, and now estimates gasoline use this summer fell to a 10-year low of 9.02 million barrels a day.

According to the report, Zehler estimated that retail gasoline could fall to nearly $3 a gallon in some parts of the country, given the pullback in oil and gasoline futures. Other market watchers are calling for a smaller move, but most are in agreement that declines are ahead.

"Somewhere along the line, there will be a 10- to 15-cent drop in gasoline prices," Kyle Cooper, managing partner of IAF Energy Advisors, told the paper. "You have to expect that those prices start to trickle down."

For more in-depth coverage of fuel prices in 2011 going into 2012, look for the September issue of CSP magazine.