AAA Fuel Gauge Report Overview

From AAA:

AAA Fuel Gauge Report Overview
By Avery Ash
Manager, Federal Relations
Monday, December 27, 2010

Crude oil prices dropped 51 cents on the day, but still hung on to the $90 range settling at $91.00 at the close of formal trading on the NYMEX. Market activity was slightly more tempered today as the Northeast digs out from a crippling winter storm that limited the ability of the trading complex to function in New York City. Despite the weather, this is the third day in a row that crude held above the $90 mark.

While many Americans spent last week preparing for the holiday weekend, both crude and gasoline prices spent the week running up to new multi-year highs. Crude prices burst through the $90 per-barrel price before settling at a 2-year high of $91.51 on December 23rd. High crude prices, buoyed by increasing global demand, have dragged retail gasoline prices higher, this week seeing a $3 national average price at the pump. The US had last seen this high an average just before Halloween in 2008.

Traditionally, the week leading up to Christmas sees little movement in the markets as traders are content to wrap-up their trading activity for tax purposes. This year proved the exception to this norm as, despite a typical light-volume trading week, crude felt upward pressure primarily generated by bullish sentiment from a highly positive report by the Department of Energy (DOE) on market fundamentals.

With crude prices already trending upward on the week, Wednesday's DOE report showed a larger than expected crude draw from inventories that provided prices with further encouragement. The report noted a 5.3-million barrel draw in crude oil which lowered total domestic stocks to 340.7-million barrels. DOE also provided statistics that showed back-to-back weeks of demand over 20-million barrels per day for the first time since January 2009. With holiday travel likely to keep demand at this level in this week's report, the stage is set for the first three consecutive week period of 20-million barrel per-day consumption since August 2008. A higher domestic demand for crude is seen as an indicator of positive strength in the US economy. While this news may reflect some level of optimism for the economy, the upward pressure on prices is not necessarily good news for consumers. At the same time, motorists do appear to be taking to the roads in increasing numbers.

In a separate report, the Federal Highway Administration (FHWA) released statistics showing both month-on-month and year-on-year increases in vehicle miles traveled (VMT). This reinforced separate reports from fuel marketers, which pointed to a strong start to the fourth quarter sales volume. FHWA reported that all US regions and all but two states (California and Arizona) saw year-on-year growth during the month of October. North Dakota saw the biggest percentage increase at 11%.

Recent international news did temper some of the market's enthusiasm for crude today. On Christmas day, the Peoples Bank of China played the role of the "Grinch" by announcing they would raise interest rates for the second time in two months. The move by Chinese authorities is in response to increasing worries over inflation as well as concerns regarding the housing market in that country. The inflation level in China recently reached a two-year high of 5.1 percent. Some market watchers are expressing concern that these actions by China, and possible interest rate hikes by other countries in Asia and Europe, may damage broader oil demand growth. If this does occur it may result in holding crude prices at their current level or perhaps pushing them back down.

The current national retail average price for a gallon of self-serve regular gasoline is $3.04, up six cents from a week ago, 19 cents from a month ago, and 44 cents from a year ago. As has been highlighted in this space for the last several weeks, this marked the first time that the US has ever nationally spent Christmas Eve with a $3.00 or greater per gallon price at the pump.