Jonathan Banks, executive automotive analyst for NADA Used Car Guide, took a cautious approach not only looking at where new-vehicle sales could head in 2011 but also as to how high fuel prices could climb this year.

At the outset of his first industry update for the year, Banks reiterated 2010’s new-vehicle sales total, which settled at about 11.6 million units.

“This was achieved purely by demand increases and not through an increase in incentives,” Banks insisted. “New product offerings and a better reputation for quality has driven substantial increases in total sales for Hyundai and Kia and domestic brands.

“Volkswagen, Subaru and Nissan also posted large gains during 2010,” he continued. “Analysts agree that the positive new-vehicle sales trend will continue during 2011.”

But how much that trend can be sustained is where Banks got to his guarded tone.

“Clearly the extent of the recovery in sales will hinge primarily on improvements in the unemployment rate and the housing market,” Banks declared. “Both of these indicators are much less optimistic than other economic measures.

“In fact NADA’s chief economist Paul Taylor states in his December Economic Update that a ‘double dip of housing prices is underway and will last into the first half of 2011,’” he went on to say. “Unemployment figures did show some promise with the unemployment rate dropping to 9.4 percent during December; however consumer confidence fell unexpectedly and overall retail sales numbers disappointed analysts.”

After opening with a new-vehicle discussion, Banks next turned to analysis strictly about used vehicles, he said that AuctionNet prices in December reflected the strength in the used market. He believes this trend will likely result in another record breaking performance from a used car index standpoint.

On a year-over-year basis, Banks noted auction price data shows an increase of more than 10 percent for pickups, SUVs and vans.

“This dramatically exceeded our original expectations and comes on the heels of the huge price increases witnessed from 2008 to 2009,” he asserted. “Our expectations for January remain fairly positive with only the luxury segments following normal, or slightly above average, depreciation trends.”

2010 Gas Price Rise and Immediate Effects

Banks pointed out the recent increase in gas prices resulted in 2010 closing with the highest price of the year — an average price per gallon at about $3.10. He calculated that reflects a 25-cent increase during the last two months.

“We don’t believe this gradual increase will create a catastrophic impact on used prices like we witnessed during the rapid price increases experienced in 2008,” Banks speculated. “However, it does create some concern since values overall are at historically high levels, especially on trucks and SUVs.

NADA UCG  forecasts that January ultimately bear out nominal declines on larger vehicles with additional depreciation coming in February.

“This goes against the traditional seasonal movement, which is usually more positive for trucks and SUVs,” Banks offered. “Our analysis indicates that there is some sensitivity when gas prices eclipse the $3 mark and if analysts’ expectations are accurate, gas prices will continue to rise. If this occurs expect to see NADA values on fuel sensitive segments fluctuate with expected changes in demand.”

Government Projections for 2011 Fuel Prices

In his analysis, Banks looked back on how fuel prices behaved between the halfway point of 2009 and the third quarter of last year. He said they remained relatively flat, increasing by only 9 cents from June 2009 through September 2010.

“This marked the longest period of price stability seen since before 2005 and was a major contributor to the significant increase in used prices witnessed on less fuel-efficient vehicles, particularly large SUVs and pickups,” Banks noted.

Since early October however, Banks reiterated that prices have risen by 32 cents, moving from an average price of $2.75 per gallon for regular graded during the week of Oct. 1 to $3.06 per gallon during the week of Dec. 31.

“This rapid increase poses a threat to used prices for certain vehicle segments and brings to mind the price depression witnessed in 2008 when fuel prices topped $4 per gallon,” Banks cautioned.

“Understandably, the industry and consumers alike are wondering how fuel prices will behave near-term and what impact they will have on used-vehicle prices,” he added.

To provide some clarity, Banks reviewed the Energy Information Administration’s Short-Term Energy Outlook. He found the EIA primarily attributes the increase in crude oil prices — and subsequently liquid fuel prices — to two factors. These were increased global demand and an uneven supply distribution.

On the demand side, Banks learned that worldwide consumption growth is forecasted to increase at twice the rate of non-OPEC supply growth for all of 2010. He said this follows two years of demand contraction and puts 2010 consumption on par with 2007.

“Per the EIA, China, the Middle East, Brazil and the United States are leading other regions in this area,” Banks stressed.

In terms of supply, Banks discovered the EIA expects final 2010 figures for non-OPEC countries to show the largest year-over-year increase since 2002. He noted the jump was driven mainly by production increases in the U.S., Brazil, China and Russia.

“Although supply is projected to be up, the EIA states that there is an uneven distribution of stock in certain regions, which has ‘some regions experiencing tightness in recent months,’” Banks shared.

Looking ahead through 2011, Banks revealed the EIA anticipates regular grade gas prices in the U.S. will average $3 per gallon, which is 8.2 percent above last year’s preliminary average price of $2.77 per gallon.

Meanwhile, he also noted diesel fuel prices are expected to increase by 25 cents, averaging $3.23 for the year

“For comparative purposes, 2008’s averages for gas and diesel were $3.26 and $3.80, respectively,” Banks mentioned.

“As with 2010, anticipated price increases in 2011 will be the result of demand growth; however, the EIA expects the rate of growth to slow relative to 2010,” he went on to say. “On the supply side, the EIA is projecting a decline in growth for non-OPEC countries relative to 2010, but this comes on the heels of the 2010’s eight-year high. OPEC production is expected to increase slightly in 2011.”

Not yet satisfied, Banks decided to take an even closer look at the EIA’s monthly forecast for 2011.

“Fuel prices aren’t going to come anywhere near 2008 levels within the next 12 months,” Banks insisted. “This being said, the rate of demand growth is difficult to predict and even the EIA states that ‘energy price forecasts are uncertain.’”

Potential Impact This Year

So what could all of these projections means for dealers?

“If fuel prices continue to move upward, consumer demand will begin to shift back towards smaller, more fuel-efficient vehicles thus leading to a softening of prices for larger, more fuel-inefficient ones,” Banks surmised.

“The severity of which will be determined by how significantly and how rapidly fuel prices increase,” he added.

During the previous two major swings in gas prices — between the summers of 2007 and 2008 and between the summer of 2008 and the winter of 2008/2009 — Banks recounted that large pickups and SUVs lost and gained 0.9 percent to 1.3 percent in prices versus the average. He said that change came for each 10-cent movement in the average price per gallon of gas.

In contrast, Banks recalled that compact cars gained and lost 1.2 percent to 1.4 percent in price versus the average for each 10-cent movement in the average price per gallon of gas.

“Generally, the better the fuel economy for a particular vehicle, the more positively that vehicle’s auction prices are related to gas prices,” Banks explained. “However, when gas prices increased significantly after the dramatic fall into the winter of 2008/2009, we did not see as strong of a reaction as we did during the 2007-2009 period of price swings, supporting the argument that consumers’ reactions are triggered by the crossing of certain psychological price boundaries.

What Banks called a “trigger point” likely has changed with each passing fuel spike. Therefore, he believes today’s threshold is potentially higher than in the past.

“Furthermore — and perhaps more importantly — used supply on pickups and SUVs in general is significantly lower today than it was two years ago,” Banks pointed out.

To illustrate, Banks shared that the volume for large SUVs and pickups dropped by 10 percent and 20 percent, respectively, last year in comparison to 2008

“Both of these factors will help to soften the blow of higher fuel prices,” Banks emphasized.

“Although December’s auction results were something of a mixed bag giving little indication as to the impact of the rising cost of fuel on used-vehicle prices, NADA expects prices for less fuel-efficient vehicles to contract as the cost of gas steadily increases,” he went on to say. “As such, Official Used Car Guide values for these vehicles will deviate from the normal seasonal uptick associated with the spring selling season and will remain flat or even decline slightly in certain cases.

“While it doesn’t appear that we’ll experience significant fuel-related shocks over the course of the next 12 months, the anticipated increases in the cost of fuel will most likely be enough to stifle the two year explosion in prices enjoyed by certain truck segments,” Banks concluded.