Last reported at $3.674 gallon on Memorial Day, the US average price for all formulas of regular grade gasoline surveyed by the Energy Information Administration looks to be near a short-time peak, with retail gasoline prices set to ease in June before again reasserting themselves to the upside in front of the Independence Day holiday July 4.
In futures trade on the New York Mercantile Exchange, the gasoline contract—Reformulated Blendstock for Oxygenate Blending, rallied from a one-month low on the spot continuation chart in early May to a one-month high on May 29, trading at a $3.0310 gallon. NYMEX RBOB futures reversed course the next day ahead of the expiration of the June contract, with the July contract taking over as nearby delivery June 2 extending the decline to a nearly two-week low in the mid $2.90s gallon.
Historically, gasoline prices advance leading up to Memorial Day, with the holiday frequently referenced as the kickoff to the summer driving season when demand for gasoline peaks. In June, gasoline prices typically drop back from the holiday-induced high until late June, early July with Independence Day, another heavily traveled holiday.
Fundamental factors helped drive the rally in May, with implied gasoline demand surging to a 9.31 million bpd three-year high during the week-ended May 23 according to the EIA. It was the sixth week of the year in which gasoline demand topped the five-year average, occurring despite a decline in exports to a six-month low, with the export rate included in the EIA’s formula for implied demand. Gasoline supply is tracking with the five-year average.
Gasoline prices were also boosted in May on geopolitical concern regarding Ukraine and Libya, which pushed the Brent crude futures contract on ICE over $111 bbl briefly May 22. Higher exports expected from Libya were short-circuited by fighting between rival groups seeking control of the North African nation that have now largely been written off for the remainder of the year. A tenuous, albeit still violent, calm in Ukraine following the election of a new president May 25 has worked to deflate the geopolitical premium in world oil prices best observed though the Brent contract.
Global oil prices were also under pressure in early June from an increase in crude production from the Organization of the Petroleum Exporting Countries in May to 30 million bpd despite the problem in member country Libya, with exports from Iraq rising. Domestically, US oil production is at a 27-year high at more than 8.4 million bpd.
Secondary wholesale costs were mixed coming into June, lower along the East Coast while climbing in the Upper Midwest. Refiner buying in the primary wholesale market for Chicago worked to boost regional spot values despite strong output by Midwest refiners, which operated in the mid-90% of capacity through May 23.