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U.S. Petroleum Markets Reverse Course After Early-January Run-up

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From the U.S. Energy Information Administration

February 12, 2010 – Six weeks ago, the December 23, 2009 issue of This Week in Petroleum focused on the declining trend in gasoline prices from early November through mid-December. However, gasoline prices soon reversed course, and rose more than 16 cents in the following three weeks, before, once again, turning downward. These fluctuations highlight the difficulty of forecasting short run movements, as well as the complexity and occasional unpredictability of petroleum markets. Figure 1. Gasoline Wholesale Spot Prices Followed Crude Oil Prices

Petroleum product price movements are influenced in part by underlying crude oil markets, as well as by additional influences on a particular product market that can either offset or amplify the effect of changes in crude oil prices. Thus, if crude oil prices are stable, gasoline prices tend to rise in the spring and decline in the fall, in concert with the gasoline supply/demand balance, while prices for heating fuels generally do the opposite.

In this case, crude oil prices, which had briefly dropped below $70 per barrel (for West Texas Intermediate) in mid-December 2009, rose above $83 per barrel during the first week of January 2010, an increase of about 32 cents per gallon.

Accordingly, gasoline wholesale spot prices jumped more than 30 cents per gallon over the same period, while retail prices, which lag changes in spot prices, rose 16 cents. Since late in the first week of January, petroleum spot and futures prices have fallen by about $9 per barrel (or around 22 cents per gallon), while spot gasoline prices fell by about 19 cents per gallon. The average retail regular gasoline price of $2.66 per gallon in EIA’s latest weekly retail price survey reflects a decline of 9 cents per gallon over the last three weeks, with further downward pressure likely, assuming crude oil prices remain at current levels.

Although a major shift in winter weather has relatively little impact on gasoline demand, its impact on heating fuels, in the United States and globally, is one factor that can affect crude oil markets. Early, severe winter weather likely played a part in the year-end uptick in crude oil prices, along with other factors, including increased optimism over the pace and sustainability of U.S. and global economic recovery, and its expected impact on petroleum demand in the coming months. By mid-January, however, temperatures had moderated; U.S. average heating degree-days for the week ending January 23 were 21 percent warmer than normal, compared to 24 percent colder than normal only two weeks earlier.Figure 2. Retail Gasoline Prices Follow Spot Prices

What, if anything, do the fluctuations of the past month portend for the remainder of the winter? Weather will be a factor – despite recent milder temperatures, some of the coldest winter weather usually occurs in February, so significant heating demand is yet to come.

Additionally, the pace of economic recovery and expectations regarding future economic trends will continue to be an influence, here and abroad, while high inventories and lackluster demand, among other factors, will tend to restrain prices. Beyond these factors, EIA is also interested in assessing the role of other market influences, such as speculation, hedging, investment, and exchange rates, as discussed in the January 27 issue of This Week in Petroleum.

While the very recent direction of U.S. petroleum markets in general, and gasoline prices specifically, has been moderately downward, it would not be too surprising to see further changes in direction over the remainder of the winter.