Posted in: Gas Prices,
by Patrick DeHaan on Oct 5, 2010 01:36 PM
By now, just about every community either knows that higher gasoline prices are coming, or they've seen them already arrive at pumps.
I took a quick peek at the national average just a few moments ago to see the latest numbers- $2.765 in the U.S. and 101.7c/L in Canada. Unfortunately, we may see prices get close to $2.80 and 103c/L on average by the end of the week if this trend continues.
I've been fielding many questions asking what in the world is going on, and I'll try and sum it up again for our audience.
The likely motive for prices climbing so quickly so fast is a surprisingly bad DOE report last week. Bad in the sense that it showed drops in gasoline inventories, oil inventories, and distillate inventories. Typically, supplies build during this time of year as demand for petroleum products sags as we transition to winter. Summer and winter see the most demand while fall is one of the weaker period as people stay indoors but while temperatures are still warm enough that homes don't need to be heated.
Anyway, that bad report last week signaled to investors that maybe there was more strength in the economy than they thought, and now since everyone is feeling better about the recovery, there is a shift in stance. Instead of being "short" or betting prices will drop, investors are moving towards "long" positions, or betting prices will rise. All of this pressures prices upwards.
Not only that, but we are seeing demand make a slight recovery compared to last year at this time. The deal is that positive news is viewed under a microscope while negative economic news is ignored or thrown in the trash. This behavior has previously led investors to overbuy in oil, causing prices to drop, and I'm hoping that's what we'll see here.
It may take a few days or weeks, but eventually the market will realize there's no justification for high prices.
However, that doesn't help us now. Wholesale gasoline prices have risen sharply, following oil. Wholesale prices are up 20-30 cents in some areas in just the last week. This quick change has resulted in stations paying more for their supply, thus passing the cost increase on to motorists.
I think prices will continue to move higher for at least the next week.