No Relief in Post Labor Day Gasoline Prices

Seasonality is dead in the gasoline market.  Since its inception, one could expect the price of gasoline to peak just prior to Memorial Day Weekend as the summer driving season kicked off and retreat to its yearly lows as the kids head back to school after Labor Day.  This year, any drop in gasoline prices will be short lived and high gas prices will be with us through the winter.

There are a number of reasons for the change.  Growing economies in South and Central America are thirsty for gasoline and America’s refineries are happy to make and ship the refined product south.  In the past, refiners would shift their production focus to refining heating oil and storing gasoline in preparation for the following summer’s demand.  This year as Hurricane Isaac came ashore, refineries in its path shut down operations and a good chunk of the Gulf Coast refiners were right in Isaac’s path.  While there was no long-term damage to any of the refineries, the loss of operations will further tighten the US gasoline supply and put upward pressure on prices.  Let’s also not forget the northeast section of the US, where several refineries have shut their doors and one Pennsylvania refinery was purchased by Delta Airlines and will be focused on producing mostly jet fuel for its fleet of airplanes.  This additional loss of production isn’t going to help the price of gas at the pump.

Underlying all of this is the price of crude oil.  After a brief dip in the early summer, the price of a barrel of crude oil has steadily climbed due to a number of factors.  The persistent tensions between Iran and the EU and US over Iran’s nuclear ambitions has created a fear that hostilities can erupt between, Iran and Israel or Iran and the US and fear in the oil market always leads to higher prices.  To top it all off, last week Federal Reserve Chairman Ben Bernanke signaled that a new round of economic stimulus could be on the way.  When the Fed prints more money to juice the economy, the price of commodities almost always rises, so expect the price of oil to rise sharply once the Fed turns on the monetary faucet.

The bottom line is that conventional thinking in regards to gasoline prices no longer applies.  The market is making some fundamental changes and our expectations should change long with it.  Low winter gas prices at the pump may soon be history.