AAA Fuel Gauge Report Overview
By Andrew Delmege
Manager, Regulatory Affairs
Monday, February 8, 2010
Oil prices posted modest increases on Monday, ending the day up about 67 cents to close at $71.86 on the New York Mercantile Exchange. The day’s increase in price was due mostly to profit taking by traders following last week’s steep drop in price.
Last week, oil prices were under tremendous downward pressure that pushed prices to their lowest levels in nearly two months. Persistent doubts about the domestic employment environment, the threat of a second European recession and a strong showing by the US dollar were the primary motivators for the week’s lower prices. There is also a growing realization among some in the markets that oil’s price jump to start 2010 was an example of market exuberance that never really had legs to stand on.
Given how sensitive oil prices have been to economic data over the course of the last several months, some were surprised that prices fell even after it was announced the US unemployment rate fell from 10 percent to 9.7 percent in January. The reason for the market’s rather cool reaction to the employment data lies in the details.
While the overall unemployment rate fell, the decline was largely due to seasonal adjustments to the data, something that is particularly significant in January. Also, the decline in the overall unemployment rate hides the vast number of job seekers who have essentially given up looking for work as well as those who are currently underemployed but still technically working. Moreover, in January it was revealed that the official government tally of unemployment under-reported losses by nearly 1 million jobs in 2009. Given these caveats, there was little for the markets to rally on and to take oil prices higher.
There are also two international news items said to be lending support to prices as the trading week begins. The governments of both the US and Germany have suggested they will pursue new targeted sanctions against Iran as a result that nation’s decision to pursue the development of high grade nuclear reactor fuel. For the most part, however, instability in Iran is nothing new, and these latest developments are likely to have already been factored into oil prices by the markets.
Similar circumstances also surround the second international news story of interest, continued unrest in Nigeria courtesy of the extremist group the Movement for the Emancipation of the Niger Delta, or MEND. The anti-oil exportation group claimed to have fully resumed its attacks on Nigerian Oil exportation by destroying an oil pipeline owned by Shell. Curiously, Shell said it had not received any reports of damage to any of its pipelines as a result of sabotage. In a tighter market than today’s, the Iranian and Nigerian developments would likely have been cause for greater concern and had a bigger impact on oil prices.
Retail gasoline demand will likely be soft for the week, due in large part to the massive snow storm that hit the Mid-Atlantic region over the weekend and severe weather in other parts of the country as well. Despite lower retail gasoline prices, travel is likely muted in many places of the country in the short term given the travel conditions. As a result, gasoline prices in many markets are still factoring in last week’s steep drop in oil prices and may have a few more cents to fall throughout the course of the week. However, this could be checked by increased demand for heating oil due to the cold and wintery weather.
National average retail gasoline prices continue to bounce around in a 25 cent band between $2.50 and $2.75. Prices have maintained this band since the middle of 2009, with a few exceptions. Retail price trend lines suggest that prices will remain in this band for the foreseeable future, barring unforeseen circumstance. On the retail side, prices continue to correct lower following the recent drop in the price of oil. As of Monday, the national average retail price for a gallon of self serve regular was $2.652. This price is about two cents cheaper than the average price one week ago.
The above information is intended to provide perspective on fuel prices
to AAA club spokespersons in speaking to the news media or in preparing
news releases. If you have questions about any information contained in
this document, do not hesitate to contact Andrew Delmege at 202-942-2072.
For information on automotive fuel issues, including AAA's recommendations regarding fuel conservation, click here.