Prepare for a Drop in Diesel and Gasoline Prices

You will soon be paying under $2 per gallon again for gasoline and diesel fuel and crude oil will go back down into the 40's. So you can make plans for that trip to see the grandparents for the holidays as well as give the economy a much needed boost. Demand for gasoline in the United States typically falls after Labor Day due to the end of the vacation season. For the week ending September 4, 2009, demand for gasoline was at its lowest point since January 9, 2008, according to MasterCard Advisors LLC.

Currently diesel fuel is cheaper than gasoline in Canada and vice versa in the US. Canadian truckers, who were paying $1.45 per litre in June 2008, are now just paying 92.5 cents in the first week of September per the M.J. Ervin & Associates weekly petroleum prices survey. That’s a whopping 36% savings in 15 months.

Gasoline prices also dropped drastically in the same time period from $1.35 per litre from June last year to .994 cents per litre in the first week of September 2009. That is complete reversal from paying 10 cents per litre more for diesel to paying almost 7 cents per litre more for gasoline last week.

The inversion in diesel fuel versus gasoline prices has not been the case in the United States since the Rita and Katrina hurricanes hit the Gulf Coast in August 2005. That event had a major long term impact on inventories of gasoline, distillates and lube stocks on both side of the border. About 25% of the U.S. refinery capacity is located on the Gulf and was severely affected by the weather phenomenon.

According to Statistics Canada, in July 2009, six of the seven major petroleum products posted declines compared with the same month a year earlier. The decrease in total product sales was led by diesel fuel, down 314.7 thousand cubic metres (-12.5%). Motor gasoline was the only product in the major petroleum product group to post higher sales, up 158.9 thousand cubic metres (+4.3%) from July 2008, and the fifth consecutive month-over-month increase in motor gasoline sales.

Meanwhile that difference in prices has not yet occurred in the U.S per the AAA fuel gauge report as of September 15, 2009:

	Regular	Mid	Premium	Diesel	85	**E85 MPG/BTU adjusted price
Current Avg.	$2.563	$2.721	$2.818	$2.664	$2.055	$2.704
Yesterday Avg.	$2.572	$2.731	$2.828	$2.671	$2.051	$2.699
Week Ago Avg.	$2.578	$2.738	$2.835	$2.674	$2.061	$2.712
Month Ago Avg.	$2.643	$2.807	$2.907	$2.686	$2.088	$2.748
Year Ago Avg.	$3.842	$4.007	$4.128	$4.185	$3.004	$3.954

Money has been poured into the commodities markets recently as the U.S. dollar fell against the Euro. Crude oil prices have risen from a low of $33 to $72 a barrel last week.

For months, investors have used crude oil as their hedge against inflation, betting that oil prices will likely increase as the economy improves and global supplies start to shrink.

So far 2009 has turned into the first normal year for the petroleum markets since 2004 due to the absence of the high roller speculators and adverse weather conditions. Those investors were burned in the big oil price free fall during the second half of 2008 by following bad advice from their investment brokers.

In August 2009 the U.S. Security and Exchange Commission took initial steps to enforce the strict limitations on dealings between bankers and stock analysts. The law requires investment firms to engage in “fair dealings with customers” and prohibits in-house analysts from issuing opinions and research reports that are at odds with their true beliefs about the market. These opinions are spread fast, far and wide utilizing today’s high tech communications.

The market is also very nervous after news that the Chicago Mercantile Exchange (CME) Group, which runs the New York Mercantile Exchange (NYMEX), notified traders and brokers of tighter enforcement of existing position limits on NYMEX, CME, and other exchanges as of September 14, 2009.

US oil refiners, who were producing diesel in record numbers last year, reversed course earlier this year and made their refining stream fall in line with the flat demand for gasoline and the ever shrinking demand for diesel fuel. Refinery runs have drifted down to 86.94% of capacity from the previous week's 87.2%. Inventories of crude oil and its finished products are at all time high.

That will have the affect of starting the downward slide for gasoline and diesel fuel prices with the price of crude oil following right along.

Disclosure: The writer does not have any investment or commodities

Comments

[yank:]

Bob:
Wow. You are trying real hard to talk oil prices down. Unfortunately it will take a lot more than that to reduce the price of crude. One point to remember is that crude prices are not determined by what demand WAS during this past summer, this past Labor Day, blah, blah, blah. Crude prices are moving higher because traders believe we have turned the corner on this recession and 2010 will see growth returning to our GDP. That may or may not prove to be the correct call. The other part of the rise as you know is due to US Dollar (USD) weakness. Once again we are surrounded by "hand wringers" that forecast continued deflation and a flight to safety, thereby bolstering the USD. Sad to say it, but that trade is getting a bit old. Investors have decided that the USD is the new "carry trade" replacing the Japanese Yen. Continued monetization of US debt (as foreigner's appetite for US Treasuries wanes) adds even more weakness to the USD. All in all, I think your dream of $40 oil is nothing more than that. A dream.

Yank

Sep 21 09:54 AM

[jerrydd:]

While oil will dip it won't go down to $40 and even then by middle next yr as the economy improves, it will go back up fast until it causes another recession sometime in 2011 probably at about $150-175/bbl.

The world can't produce as much oil as it did last spring 08 ever again as we hit peal oil. So until we get off oil, this will keep happening..

Sep 21 09:59 AM

[GasmanCT:]

I wouldn't say "never again" to $40 oil, but you need to acknowledge that the US is only one small part of world oil demand. As developing countries like India are putting cars on the road at record rates and China switches from bicycles to automobiles, it seems imminent that we have yet to scratch the surface of world demand. Also, assuming "peak oil" is accurate you are looking at a clear picture of increasing demand and shrinking supply in the decades moving forward. Sure we might enjoy a little relief in the upcoming months as the supply overhang stays put, but after that I would not be surprised to see prices back at their peak.

Peter

Sep 21 11:54 AM

[a. palmer jr.:]

I think he meant "peak oil".

Sep 21 11:56 AM

[a. palmer jr.:]

I don't expect gasoline and diesel prices to permanently drop until I see scads of electric and hydrogen cars running the streets. You might see one every now and then in the cities but where I live I haven't ever seen one. We're starting to see more Toyota Prius cars now than ever before but no electrics yet.

Sep 21 12:00 PM

[bottomdrawer:]

Looks like we have a bunch of bulls in oil. At some time fundamentals will trump the "investment" money chasing this space and Bob's forecast will be a reality.

Sep 21 01:51 PM

[Bob van der...:]

Yank - Before passing judgment on my forecasts please read my articles published on Seeking Alpha earlier this year. My theory that gasoline prices are now driving crude oil prices has been true since about a year ago. The US refineries are now in the middle of switching from producing summer to making winter gasoline. That puts an extra 10% of gasoline supply into the market, which is currently running flat on demand. Major oil companies are stuck with the Last In/First Out method of accounting for finished inventories by the end of each year. The same thing occurred at this time last year and the rest as they say is history. Crude oil eventually followed the free fall in gasoline prices and after bottoming out in the early part of this year regained strength in March when - guess what? - US refineries have to switch to making summer gasoline

Sep 21 06:58 PM

[The Greates...:]

They should have never been above $2.00 a gallon anyway, so much for the supply and demand conclusion.

Sep 21 10:55 PM

[The Greates...:]

Further, I would not put a lot of stock in the "Peak Oil" idea either, if you had something the world needed, what would you be telling everyone?
The Sky is falling, the sky is falling.......

Sep 21 10:59 PM

[ternron:]

I would just like to say that if the oil goes up and then the gas also rises, the good ole USA will, imo, go straight back to where we were a few months ago---losing jobs, mass lay-offs, etc. Is this what you people want??? I for one think we need to put the oil producers in their place. Greed is running our great country now. I often think about other places who have been thriving only to crash and burn. May not have anything to do with this but recall the Olympics is Sarajevo? Look at their country now. I know we live in the United States, but it could happen here, maybe more slowly, but it could. What about all these unemployed people with their benefits scheduled to run out?? What are they going to do when the money is gone. Better protect yourselves, I say!!

Sep 22 01:20 PM