It’s an easy bet.  Gasoline prices in nearly every state still have some catching up to do and by the time you read this, your local retail fuel market may have prices 20-40cts gal below Memorial Day 2007 levels. Wholesale prices have moved dramatically lower in the second half of July, and nervous financial markets don’t help the case for higher oil prices.

   But, before I wax further on retail fuel values, let me make mention of why commodities’ markets - - and oil in particular - - are so much less orderly than say the stock market. Yesterday saw two and three percent moves in equities’ indices. That put the Dow, S&P, NYSE, and NASDAQ in the number one or two slot on evening news casts. However, daily percentage swings of 2-4% represent the norm in oil futures markets.

   Spot prices for products like gasoline and diesel this week touched low points not witnessed since February and April. Interestingly, the drops occurred even as crude oil flirted with new all-time highs. Finished fuel values eased despite tremendous bullish sentiment among the paper trading community that largely determines day-to-day futures’ values.

   Heading into the weekend, the national average for regular unleaded gasoline at the pump was $2.92 gal, down 30.5cts gal from the Memorial Day peak. For details, visit www.fuelgaugereport.com  Current prices are also down about 10cts gal from last year, when the Summer peak occurred in the second week of August. All but nineteen states have average prices for gasoline that are under $3.00 gal, and truth be known, discriminating buyers can find gasoline for less than $3.00 gal in nearly every state in the continental land mass (Hawaii has higher prices, as is traditional).

   And believe it or not, there are some rural areas where gasoline is closer to $2.00 gal than $3.00 gal. In South Carolina, we’ve seen some sub-$2.50 gal prices surface like popcorn Summer thunderstorms and some other states find aggressive retailers priced for just a few pennies more.

What’s Behind the Midsummer Slump?

   All three major petroleum futures’ contracts - - West Texas Intermediate crude, N.Y. RBOB (blendstock) and N.Y. heating oil - - have witnessed huge downdrafts in the last ten days, although crude oil has been impacted by crosswinds.

     The losses occurred even after sentiment surveys conducted by commodities’ analysts revealed that traders with a bullish outlook in the three futures contracts outnumbered bears by a ratio of three-to-one. Sentiment is deemed excessive and markets are often judged to be overbought when there is a two-to-one margin, so the surveys—released in the last ten days - - clearly represented a red flag.

   A second major steering current for oil prices was provided by the U.S. stock market. Myth holds that oil and financial markets move inversely, but the truth is that the two segments move in concert much more often than not. Crude oil approached $77.25 bbl on Thursday but 300 point losses for the Dow and NYSE indices proved to be an insurmountable headwind for the rally and WTI dipped back below $75 bbl. Oil cannot continue to rise if U.S. and other global stock markets are under selling assaults.

   The price of benchmark WTI crude as I write this is just over $76 bbl and some sweet blends of crude have traded at $80 bbl, thereby fulfilling the predictions of anyone who suggested record highs for crude in 2007.

   But the price of transportation fuels  - - -gasoline and diesel - - are sharply lower than they were one month ago, and one year ago.

   New York gasoline blendstock, for example, is some 26cts gal cheaper than end-July 2006 levels, and Gulf Coast gasoline is down 25cts gal from last year. The Midwestern market - - where refinery woes should persist into September - - finds gasoline at $2.16 gal, more than 20cts gal below the $2.38 gal level on July 31, 2007. California grades of gasoline are already 20cts gal below where they began August of last year. Across the country, most grades of diesel are 10-30cts gal below year ago numbers.

The Problem With August

   All of this is relevant because August is one of the least predictable months. Refiners are still motivated to manufacture plenty of gasoline and diesel, as both fetch $10-$20 bbl above benchmark crude. Those margins may be a far cry from the $30-$40 bbl levels occasionally witnessed in May and June 2007, but they are still well above historical levels if one tosses out post-2005 history in the analysis.

   Gulf Coast refinery output and foreign imports into the U.S. East Coast hold the key in August. If Gulf Coast output of gasoline and diesel keeps close to the brisk levels detailed by Department of Energy this week, we’ll see comfortable supply in a month that has the potential to shake the confidence of anyone holding inventory. If foreign refiners continue to supply nearly 16 percent of U.S. motor fuel, the Summer bloom could wilt rapidly.  Unfortunately, tropical weather has the potential to disrupt both Gulf Coast refining and East Coast cargo imports. We’re only up to “C” in the named storm categories, and perhaps we’ll be lucky through Labor Day.

   Nothing in August is a certainty. So as you listen to refining CEO’s as they detail spectacular results for the second quarter, keep in mind that the trading terrain between now and Labor Day is especially perilous.

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   Footnote:  Watch for ethanol blends of gasoline coming to a station near you. Until now, ethanol has made its way into gasoline formulae only in markets mandated to use reformulated gasoline (which requires 5.7% to 10% ethanol) and within Midwestern locales where alcohol represents ambrosia for the local economy.

    Right now, the wholesale price of ethanol in 2008 is as much as 30cts gal below the price of refinery-produced gasoline blends. It is hypothetically possible to buy ethanol later this year and in 2008, and use it to lower the wholesale finished gasoline price by as much as 7-8cts gal (that does include the federal 5.1cts gal subsidy, but I won’t get into politics on that issue).