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Gasoline Price Spike Comes Amid Signs of Life Among Consumers

One side effect of Isaac is likely to be a spike in gasoline prices, temporarily stinging consumers and the economy.

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Whether it has a lingering impact on fuel prices has yet to be seen, depending on how the storm develops. Isaac is expected to come ashore as a hurricane somewhere between the Florida-Alabama border and Louisiana Tuesday afternoon.

“I’m expecting a 10 cents a gallon (increase) over the course of the next couple of days,” said Andy Lipow, president of Lipow Oil Associates. Lipow said Gulf Coast refiners have already shut in 1.4 million barrels a day, or about 7 to 8 percent of U.S. refining capacity ahead of the storm. He said as much as 13 percent could be shut if the Motiva refineries and Exxon Baton Rouge refinery follow suit.

The increase in gasoline also comes as consumers wind up spending on back-to-school items and look forward to the holiday shopping season. Gasoline prices were already at a record level for this time of year, and it is unusual for prices to be rising this much into the Labor Day, viewed as the end of the summer driving season.

“It’s a substantial increase from the low $3.30s we saw in early July, so the consumer is feeling the pinch,” Lipow said.

Gasoline prices have risen since late June due to refining issues, and the Isaac-related shutdowns and the weekend explosion at a Venezuelan refinery will make supplies of gasoline and other refined fuels tighter. Gasoline futures on the Nymex jumped 2.5 percent to settle at $3.15 a gallon Monday. Oil and natural gas were both lower on the day, as traders perceived the greater threat to be to gasoline supplies.

A more dramatic jump in gasoline was seen in the spot wholesale market along the Gulf Coast, where gasoline rose 20 cents to $3.25 a gallon Monday, according to OPIS. Lipow does not expect to see all of that to show up in consumer prices.

“We’re now sitting at $3.75 (a gallon), and it looks like we’re heading to $3.85 a gallon for a national average,” he said. Prices at the pump should start to come back down from the temporary spike, as refiners switch to easier to make winter fuel in mid-September, and as demand drops off after summer driving ends, he said.

The shutdown refineries will take about two weeks to get back on line, if there’s no flooding or power outages affecting them. “I don’t anticipate major damage here. It’s not nearly as significant a storm as Katrina” in terms of winds. Also, with drought conditions in the Midwest, the Mississippi River is at a low level , and it should be able to absorb the heavy rains, Lipow said.

Economists and analysts had seen the decline in gasoline prices from the spring highs of near $4 a gallon as a break for the economy – and the consumer. But some of that has reversed as gasoline prices crept back up during the summer. Even so, analysts are still looking to the consumer as one of the few potential positives for the economy.

LPL chief market strategist Jeff Kleintop, in a note Monday, said gasoline prices are the biggest threat from hurricane to the economy, even as they can temporarily disrupt employment and output in the areas affected. “Gasoline prices have risen nearly 10 percent above the year-ago level and 30 percent above the five-year average- but this has not yet deterred consumers,” he noted, adding retail sales still grew at 3 to 4 percent pace in June and July.

“However a shock from reduced output due to hurricanes could push gasoline prices at the pump higher in the next few months, relative to June and July. The burden an additional 50 cents at the pump may place on consumers could total $17 billion,” he wrote.

Wells Fargo Securities institutional equity strategist Gina Martin Adams said she likes consumer discretionary stocks right now, but she does see rising gasoline prices as a risk.

Adams issued a report on consumer stocks Monday. She said the consumer discretionary sector was the only one to see positive earnings revision momentum over the last three months. She likes household durables, media and specialty retail but not the auto segments. In staples, she recommends the food and staples retailing group, tobacco and food products but is underweight the household products segment.

The 0.8 percent jump in July retail sales surprised economists, who had expected just a 0.3 percent increase. An early read on back-to-school shopping will show up when chain stores report August sales on Thursday.

“We were flirting with retail sales declines. To see things bounce back, just a hair I think is notable, and probably a sign of continued stability in the consumer space right now,” she said.

Adams said there are a number of factors making the consumer stocks attractive. For instance, the housing recovery is in its early stages and that should help retailers as consumers spend on improvements and decorating. She also likes the media space, which is helped when consumers look for content to go along with new device purchases. Media is also lifted by political spending in an election year.

She also pointed to a progressive increase in household net worth, which is now just seven percent below its 2007 peak.

“Consumers on paper are wealthier,” than at any time since the financial crisis began. But “you do have gas prices weighing on confidence,” she said.

Tuesday’s data should provide some insight into the consumer. Consumer confidence is reported at 10 a.m. ET, and S&P/Case Shiller home price data at 9 a.m.

What Else To Watch

There is also a Treasury auction at 1 p.m. of $35 billion 2-year notes.

Charlie Parkhurst of Barclays Treasury desk said he expects some concession into the auction with the pre-holiday week’s light trading volumes. The Fed’s purchase operations for Operation Twist was the highlight of a quiet trading day Monday. The Fed purchased $1.8 billion in securities, dated 2036 and longer, and it has purchase operations through Thursday.

“It (the market) would probably be a lot cheaper if it wasn’t for the Fed’s intervention. The Fed is having the desired effect with its purchases,” he said. The 10-year yield slipped to 1.651 percent Monday.

“I think with Jackson Hole later this week, and the holiday kind of vacation time of the year, I doubt any of these (economic) numbers are going to be market moving, to be honest,” he said. Fed Chairman Ben Bernanke speaks at the Fed’s annual symposium in Jackson Hole Friday morning, and some traders anticipate he may drop hints about further easing.

“We do not feel Bernanke will use that forum to signal any change,” said Parkhurst, noting that is what the bond market expects as well. “We’ll wait for the payrolls, and the FOMC meeting. We don’t think there will be any policy change of any sort, or any hint of it.”

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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