U.S. gasoline prices move with Brent prices rather than WTI prices

Recent increases in U.S. crude oil production have sparked discussion on how this increase in supply will be used by U.S. refiners, given current limitations on exporting domestic crude. On October 30, EIA released a study that explored the relationships between crude oil and gasoline prices (Figure 1).

Key findings from the analysis include:

• The price of Brent crude oil, an international benchmark, is more important than the price of West Texas Intermediate (WTI), a domestic benchmark, for determining gasoline prices in all four U.S. regions studied, including the Midwest.
• The effect that a relaxation of current limitations on U.S. crude oil exports would have on U.S. gasoline prices depends on its effect on international crude prices, such as Brent, rather than its effect on domestic crude prices.
• Gasoline is a globally traded commodity, and prices are highly correlated across global spot markets.
• Gasoline supply, demand, and trade in various regions are changing; one effect is that U.S. Gulf Coast and Chicago spot gasoline prices, which are closely linked, are now often the lowest in the world during fall and winter months.

A change in current limitations on crude oil exports could have implications for both domestic and international crude oil prices. Such a relaxation could raise the prices of domestically produced oil. If higher prices for domestic crude were to spur additional U.S. production than might otherwise occur, the increase to global crude oil supply could reduce the global price of crude.

The extent to which domestic crude prices might rise, and global crude prices might fall, depends on a host of factors, including the degree to which current export limitations affect prices received by domestic producers, the sensitivity of future domestic production to price changes, the ability of domestic refiners to absorb domestic production, and the reaction of key foreign producers to changes in the level of U.S. crude production.

Relationships between gasoline and crude oil prices

U.S. retail gasoline prices reflect four key components: the price of crude oil; refining costs and profit margins; retail and distribution costs and profit margins; and taxes. The first two factors tend to be more volatile, causing most of the variation in retail gasoline prices, while the latter two reflect the retail portion and tend to be relatively stable.

A general guideline for how crude oil prices affect gasoline is that a $1-per-barrel change in the price of crude oil translates into a change of about 2.4 cents per gallon of gasoline. (There are 42 gallons in one barrel, and 2.4 cents is about 1/42 of $1.)

While there are many crude oils traded around the globe, two of the major benchmark light sweet crudes are West Texas Intermediate (WTI) and North Sea Brent. Before 2010, there was little reason to specify which crude oil price was more important with respect to effects on domestic gasoline prices, as the two benchmarks traded at similar prices. In mid-2010, more Canadian exports to the U.S. Midwest and increased production in the United States led to transportation constraints, which caused the price of WTI to fall below the Brent price. The surge of domestic production also reduced U.S. crude imports.

However, the lower WTI prices did not result in lower U.S. gasoline prices because, as EIA's analysis shows, U.S. gasoline prices are more closely linked to the price of Brent. The analysis shows this is the case in all parts of the country, including the Midwest, where the trading hub for WTI is located (Cushing, Oklahoma).

Gasoline itself is also a globally traded commodity, and the United States both imports and exports gasoline and other finished products. Figure 2 shows prices at trading hubs around the world: New York Harbor, U.S. Gulf Coast, and Chicago, as well as Singapore, the Mediterranean, and Amsterdam-Rotterdam-Antwerp (ARA). These prices trade within a relatively narrow band, and the prices between different points reflect the transportation costs associated with shipping gasoline from exporting markets to importing markets.

Global gasoline supply and demand patterns have been evolving. Gasoline demand in Asia, Latin America, and the Middle East has been outpacing gasoline production in those regions. In the United States, demand is declining but refinery production of gasoline has been rising, resulting in increasing exports of U.S. gasoline to the global market. Because of these changes in the market and seasonal fluctuations in U.S. gasoline demand, the gasoline spot prices in the U.S. Gulf Coast or Chicago are now often the lowest in the world during fall and winter months.

While EIA's new report provides directional insights regarding the implications for U.S. gasoline prices of a possible relaxation of current limitations on crude oil exports, it does not address the extent of any actual change in domestic production or the domestic or international price of crude oil that might follow from a decision to relax or eliminate those limitations. EIA is undertaking further analyses that will examine those issues and expects to report additional results over the coming months.

U.S. gasoline prices average below $3 per gallon for first time since 2010, most diesel fuel prices decline

The U.S. average price for regular gasoline fell six cents to $2.99 per gallon as of November 3, 2014, 27 cents lower than a year ago, and the first U.S. average price below the $3.00-per-gallon mark since December 20, 2010. The East Coast, Midwest, and Gulf Coast prices were all below $3.00 per gallon, falling six cents each to $2.99 per gallon, $2.96 per gallon, and $2.77 per gallon, respectively. The West Coast price fell nine cents to $3.24 per gallon, while the Rocky Mountain price fell six cents to $3.14 per gallon.

The U.S. average price of diesel fuel decreased one cent to $3.62 per gallon, down 23 cents from the same time last year. Only the Midwest price increased, rising by one cent to $3.62 per gallon. The East Coast and Gulf Coast prices fell three cents each, to $3.60 per gallon and $3.53 per gallon, respectively. The West Coast price was down a cent to $3.79 per gallon, while the Rocky Mountain price remained unchanged at $3.71 per gallon.

Propane inventories post slight decline

U.S. propane stocks decreased by 0.1 million barrels last week to 80.1 million barrels as of October 31, 2014, 18.1 million barrels (29.1%) higher than a year ago. Midwest inventories decreased by 0.5 million barrels, while Gulf Coast inventories increased by 0.4 million barrels. Both East Coast inventories and Rocky Mountain/West Coast inventories remained unchanged. Propylene non-fuel-use inventories represented 3.1% of total propane inventories.

Residential heating fuel prices decrease

As of November 3, 2014, residential heating oil prices averaged $3.43 per gallon, about 2 cents per gallon lower than last week, and 39 cents less than last year’s price for the same week. Wholesale heating oil prices averaged nearly $2.70 per gallon, 8 cents per gallon more than last week and almost 31 cents lower when compared to the same time last year.

Residential propane prices decreased by one cent last week to $2.40 per gallon, almost 5 cents less than the price at the same time last year. Wholesale propane prices averaged nearly $1.07 per gallon, 3 cents more than last week’s price and almost 30 cents per gallon lower than the November 4, 2013 price.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-0786.

Tags: Brent, crude oil, gasoline, prices, WTI (West Texas Intermediate)