Wednesday, August 20, 2014

Fear premium a dead cat bounce as price falls three times in five days

I began Fear premium stalls out in time for Dream Cruise last Thursday evening by noting a short episode of price stability.
Monday, the corner station matched the rest at $3.45, which is where all the neighborhood stations have remained since.  The fear premium stalled out, but prices still haven't returned to where they were a week ago.
I ended it by making two predictions in one.  Here's the first forecast.
Gas prices should drop.  Unless something dramatic happens to either make the fear premium return or reduce supplies, I expect gas to resume falling.
That's exactly what happened.  The three stations down the block reduced their price to $3.42 on Friday.  They dropped it again to $3.39 on Sunday and the corner station matched them.  Monday, at least one of the stations down the street lowered its price to $3.35 (the rest were closed and their signs were off, so I couldn't check).  Finally, the corner station matched that price last night.  The corner station is exactly where it was before it jumped over the limbo bar then the fear premium returned as U.S. bombed the Sith Jihad.  That minor price spike is now a dead cat bounce, hence the image I used.

What about that second prediction?
However, even though wholesale prices are even weaker than when gas was $3.32, I don't expect retail prices to test that floor again until after Labor Day.  Not only is that particular last blast of summer going to increase demand and put a floor under prices, this week is Dream Cruise.  That's a captive customer base that will keep demand up through the weekend.
Dream Cruise kept the price above $3.40 until it ended, as the fall below that level happened after the event ended.  As for that second prediction, the neighborhood outlets are only three cents above the $3.32 of two weeks ago.  It's time to check the retail and wholesale price environment to see if they could go to $3.29 before Labor Day.  Follow over the jump.

I start, as I usually do, with GasBuddy, which shows that the national average is now at $3.43.  The Detroit average is still slighly higher, but is converging on the national average at just under $3.44, a decline of more than six cents since the last update.  Based on the usual pattern of the local stations being up to a dime below the Detroit average, they are right on target.  The local retail prices don't predict a price drop this week.  Labor Day is almost two weeks away.  To see if prices will fall next week, it's time to check the prices of wholesale oil and gasoline with Reuters, which reports U.S. crude oil jumps ahead of expiry, inventory drop supports.
U.S. crude oil rose in choppy trading on Wednesday ahead of the September contract's expiration and after government data showed crude stocks in the United States fell sharply last week.

Front-month October Brent and U.S. October crude saw more modest gains, as Brent recovered after falling to a 14-month low on Tuesday.

U.S. crude stocks slid by 4.5 million barrels last week, the U.S. Energy Information Administration (EIA) said, more than analysts had expected. Stocks in Cushing, Oklahoma - the delivery point for the U.S. crude contract - rose by 1.76 million barrels.

Gasoline stocks rose 585,000 barrels against expectations for a drop while distillate stocks fell 960,000 barrels, slightly more than forecast.

Brent crude for October delivery rose 72 cents to settle at $102.28 a barrel. The contract touched $101.07 on Tuesday, its lowest since June 26, 2013.

The expiring U.S. September crude contract rose $1.59 to settle at $96.07. The more actively-traded October crude rose 59 cents to settle at $93.45, with its discount to Brent CL-LCO1=R above $9 intraday, the widest spread since June.
U.S. September RBOB gasoline futures were up only 0.60 cent at $2.7014, having retreated from its $2.7349 a gallon peak notched ahead of the EIA data.
Both oil futures and wholesale gasoline may be up a bit from their lows, but they're only slightly higher than they were last week, when The Wall Street Journal headline read Oil Prices Keep Tumbling to Multi-Month Lows.  At that time, WTI was $95.58 a barrel, Brent was at $102.01 a barrel for September and $102.07 a barrel for October, and RBOB was at $2.6666 a gallon.  Still, the wholesale environment looks like prices are bouncing off a floor, not falling off a ledge to a new lower level.  Prices might continue to go down, but not very quickly.  Check back next week to see if the neighborhood outlets drop below $3.32 and head to $3.29.  I don't think it will happen next week.

The longer-range forecast is still for lower prices.  For example, Calculated Risk trumpeted EIA Forecast: Gasoline Prices expected to decline to $3.30 per gallon in December last week.  I'd be surprised if it took that long for the national average to go that low.  Last December, I predicted a floor of $3.10 for the national average this year.  It could go that low.  I also predicted a ceiling of $3.80.  So far, Gas Buddy has shown that prediction standing, although there are two more months left in the hurricane season for a price spike and events in Ukraine and Iraq could still revive the fear premium, so I'm not declaring victory yet.

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