The State of Fuel
A look back at gasoline and diesel price trends—and a glimpse ahead.
With the national unemployment rate stuck at 9.5% and the economy still mired in recession, gasoline and diesel prices have reflected depressed demand and excess supply over the past year. But there are signs that things are fueling up: According to August 2010 projections from the Energy Information Administration, regular-grade gasoline retail prices should average $2.77 per gallon in the second half of 2010, compared to an average of $2.35 per gallon in 2009. Prices of West Texas Intermediate (WTI) crude should average $80 per barrel during second-half 2010, rising to $85 by the end of 2011. To help retailers get grounded on the state of fuel, CSP, in collaboration with GasBuddy Organization Inc., Brooklyn Park, Minn., a gasoline price information service; and Telvent DTN, Omaha, Neb., a provider of energy market data, presents the following review of gasoline and diesel prices and a forecast of what may come in 2011. Regardless of the numbers, the same combination of forces are shaping fuel price dynamics, be it a recession or boom time. “The major stories that dictate where prices move: the economy, spare capacity, OPEC, refinery capacity and hurricane season,” says Patrick DeHaan of GasBuddy. “Station owners should keep an eye on these factors to improve margins.” Gasoline Prices: 2010 in Review
WINTER:Gasoline prices followed a traditional pattern to begin 2010, starting at $2.65 per gallon for self-serve regular, having risen 8 cents per gallon between Christmas 2009 and New Year’s Day 2010. Prices peaked at $2.758 in mid-January, having risen about 20 cents per gallon in less than one month. The rally was likely ignited by low gasoline inventories, combined with perceived strength in the economy and a weaker dollar. After hitting the Jan. 14 peak, retail gasoline prices began to decline for nearly a month as inventories gained. Gasoline outlets saw healthy margins from mid-January until mid-February as wholesale price decreases outpaced retail price decreases. Retail prices bottomed out at $2.612 on Feb. 16.
SPRING: Retail gasoline prices reversed course as refiners began their seasonal switch. They quickly increased as jitters about refinery outages and supply ensued on trading floors. Wholesale gasoline prices began to jump as the spring rally came into full force. By March 1, retail prices had jumped to $2.701, and by March 11, prices hit $2.781. Margins deteriorated quickly as retail price advances were outpaced by wholesale price increases. Wholesale price increases started to slow by late-March as oil tested a ceiling near $83 to $86 per barrel. But by April 1, retail prices began to rise yet again, hitting a peak May 5 at $2.937 per gallon, while gasoline margins suffered until the first week in May. The second week in May brought a dramatic turnaround: The debt crisis in Greece and concern about European debt battered the euro while strengthening the dollar. Many also feared that Greece’s debt problems would spread to the fragile U.S. economy. These debt concerns were a major issue for the timing of a correction in the stock market and commodities: Oil dramatically decreased in value and gasoline prices followed.
SUMMER: The start to the summer driving season was relatively quiet for most of the United States. Some refinery issues hampered the upper West Coast but were corrected several weeks later. Gasoline prices had been contained at $2.70 to $2.75 for late May through July, while margins continued to be somewhat stable as wholesale costs remained within a similar threshold.
FALL (FORECASTED): The second half of 2010 will likely see more volatility than that of the past two years. With the exception of a major storm in the Gulf of Mexico, average gasoline prices will remain within a range of $2.69 to $2.87 per gallon. Should a major storm threaten the Gulf, prices will rise an additional 12 to 17 cents per gallon. Prices will remain higher than average on the West Coast and below average in the Gulf.
WINTER (FORECASTED): Prices will drop as demand wanes, with late-autumn gas prices averaging $2.75 to $2.95 in many areas. This span will continue to widen by year’s end, with average prices ranging from $2.68 to $2.92 from November through late December. Until global economies show consistent improvement, expect gasoline prices to remain subdued. Should the U.S. economy continue to show many positive signs of growth, gasoline prices will move higher. If the economy shows a very strong rebound—which remains unlikely—gasoline prices could easily rise 5% to 12%. This shift would also push gasoline margins to poor or even negative numbers. Source: GasBuddy Organization Inc. Forecast: 2011 Gasoline Prices
In 2011, a few different scenarios could occur, either taking prices to levels not seen since record-setting 2008, or potentially leading to stagnant prices. No matter the situation, gasoline prices will not see a sustainable climb until there are clear indications that the U.S. economy has started recovering. Two major situations will fuel prices up or down in 2011:
SCENARIO 1: STRONG ECONOMY
The economy improves and the jobless rate falls well under 10%. In this scenario, the year may bring poor margins for gasoline stations. Gasoline prices in January 2011 would hit $2.70 to $2.95 before falling in February to $2.59 to $2.84. Spring would bring an unusually strong rally as the United States and other global economies mark improvement and see an increase in petroleum and gasoline demand, adding upward pressure on prices.
The spring rally, which typically begins in March, would 166 C S P O c t o b e r 2 0 1 0 last until mid-May in this scenario, with prices starting out March 2011 at $2.65 to $2.90 and fluctuating until early April. A more volatile portion of the rally will begin in early April and last until mid-May. Prices will climb to $2.90 to $3.20 during this time, with the strength in the economy dictating the limits. In the case of clear and strong improvements on multiple fronts, gasoline prices could go as high as $3.24 to $3.48. Prices would peak from $2.90 to $3.48 in late May before slowly falling to $2.85 to $3.35 for the mid-summer months and the July 4 holiday. As hurricane season approaches, gasoline prices could swing wildly. Should the country make it out of hurricane season unscathed, prices will drop to $2.70 to $3.10. Should a major hurricane or storms affect Gulf oil operations, gasoline prices could see another peak later in the summer near $2.95 to $3.50. Prices would then fall slightly for the autumn months to $2.80 to $3.30.
SCENARIO 2: WEAK ECONOMY
The economy remains weak and jobless numbers remain high, between 8% and 10%. Such a scenario would mean improved margins for gasoline-station owners, but possibly lower sales of gasoline. January would see prices range from $2.62 to $2.80, and fall to $2.56 to $2.77 as February approaches. The spring rally would likely not begin until late March or early April.
Prices would begin to increase in late March to $2.67 to $2.89 before leveling off around Memorial Day to $2.75 to $3.00. Prices would see a small decline during June and July, while margins would improve. The average price during these months would range from $2.72 to $3.04.
As hurricane season looms, prices become more volatile. Expect possibly rapid changes with margins at risk. Should forecasts point to an unusually active hurricane season, we would see prices rise to $2.85 to $3.10 during the late-summer months. If the tropics remain quiet, margins would improve, with prices remaining between $2.77 and $3.03.
Autumn months would feature prices between $2.74 and $2.96 as demand wanes and drops to seasonal lows. With the economy continuing to show little growth, 2011 prices would close out the year near or slightly under $3 per gallon. In essence, 2011 would see prices higher than in 2009 and 2010 but below record prices seen in 2008. Source: GasBuddy Organization Inc.
Gasoline demand in first-quarter 2010 held below the suggested consumption rate in 2009 and the five-year (2005 through 2009) average, while showing recovery in the second quarter, according to data shared by Telvent DTN, Omaha, Neb. It held below the five-year average during the first five months of 2010, reflecting the effect of high national unemployment.
The demand for diesel in 2010 has outpaced the 2009 consumption rate while mostly following the five-year (2005-2009) average through the first five months of the year. According to Brian Milne, refined fuels editor for Telvent DTN, it suggests economic growth.
“Diesel demand closely correlates with the gross domestic product (GDP) performance in the United States because diesel is primarily used in industrial and commercial settings such as construction and commerce,” he says, citing that first-quarter 2010 GDP grew at a 3.7% annualized rate. As of press time, the first estimate for secondquarter 2010 was 2.4%.