Unleaded gasoline (RBOB) futures are trading at $3.09 a gallon, which puts the retail price at the pump around $3.85 a gallon. This is more than $1 a gallon higher than last year at this time. The bad news is that Memorial Day marks the beginning of driving season and demand for gasoline is at its peak during the summer. Does this mean we are in for more pain at the pump this summer?
Even though demand for gasoline typically peaks in the summer, gasoline futures prices seasonally peak in June. The reasoning for this lies in the fact that gasoline supplies have already been ordered by wholesalers to secure inventory ahead of driving season. That buying typically peaks around Memorial Day. A similar event occurs in the heating oil market where wholesalers purchase heating oil inventories ahead of the winter months.
Seasonal patterns should only be viewed as averages and anything can happen in any given year. There are many variables that can influence gas prices this summer. The economy, hurricane season, flooding in the Mississippi River region and the value of the dollar could all have play a large part in gas prices.
Fundamentally, the gasoline stocks are below the levels of last year, but close to the 5-year average. It seems unlikely we will see a supply shortage anytime soon. We have recently seen demand for gasoline drop when prices moved above $4 at the pump. This in itself could prevent gasoline from moving much higher. Technically, the market had a sharp drop in early May and it looks like it is trying to move higher once again. Traders may be looking to follow the momentum higher in the near term, but they will probably be looking to sell heavily around the $3.40 level.