Released on February 25, 2009
(Next Release on March 4, 2009)

Are Gasoline and Crude Oil Price Patterns Actually Diverging?

Recently, we at EIA have received many inquiries about why gasoline retail prices have been rising compared to the New York Mercantile Exchange’s (NYMEX’s) reported price of crude oil. The national media have also run several prominent stories on this divergence in prices. In particular, EIA’s reported average retail price of regular gasoline in the United States rose from $1.61 to $1.96 between December 29th and February 16th. During the same period, NYMEX’s most reported price for crude oil was volatile, but had no clear upward trend. So what’s going on?

Before addressing the question, it’s worth just a moment to discuss what, exactly, NYMEX’s most reported price really is. NYMEX is a futures exchange, where different traders can buy and sell a very particular type of oil for many months out into the future. The particular type of oil is called “West Texas Intermediate” or “WTI” for short. WTI is light, sweet crude, with low sulfur content and relatively high yields of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel. Most futures contracts never go to delivery, but they can, and when they do they must be delivered to Cushing, Oklahoma. As a result, the NYMEX futures price inevitably reflects local conditions in Cushing, as well as larger market trends. Of course, WTI is only one kind of crude oil in a world full of trading that takes place for many types of oil.

Now, two main factors account for the recent divergence in prices. The first is that—generally speaking—oil prices have been rising, even though a local supply glut at Cushing has depressed prices at that location, and, therefore, on NYMEX. Even though the financial press, EIA, and others often cite the NYMEX price, WTI is not the only kind of oil used in the United States to produce gasoline. Not by a long shot. So, it turns out that price rises for other crude oils used to make U.S. gasoline account for about half the rise in U.S. wholesale gasoline prices between December 29th and February 16th . Figure 1 shows the effect of looking at imported crude oil prices instead of focusing only on the depressed WTI price. The composite price labeled “Average Spot Prices of U.S. Imported Crudes” used by U.S. refiners is compared to both WTI and to another international benchmark, Brent. (Brent is light, sweet North Sea crude that is usually refined in Northwest Europe but can be shipped to the United States or the Mediterranean.) The composite, which represents roughly two-thirds of crude input to U.S. refineries, rose by over $8 per barrel since late December, and matches U.S. consumers’ experiences at the pump much more closely.

The second key factor driving recent gasoline prices arises from changes in the balance of gasoline supply and demand. Just as there is a crude oil market, there is a wholesale gasoline market as well. Nothing forces the two markets to operate in lockstep. After all, crude oil makes a complex array of products in addition to gasoline, so the overall supply and demand for crude oil differs from the supply and demand of gasoline alone. Different conditions of supply and demand for gasoline versus crude oil can affect their prices. The “gross gasoline margin,” which we will define as the difference between the wholesale (spot) price of gasoline and the spot price of crude oil, is a key indicator of divergent conditions between the two markets. Except for a period immediately after hurricanes Gustav and Ike, U.S. gasoline markets in 2008 saw weak margins because gasoline was better-supplied relative to demand than crude oil was. Figure 2 shows gross gasoline margins along the Gulf Coast measured against the WTI and Brent benchmarks from the beginning of November 2008 through mid-February. Both calculations show the same directional trend, but the disconnect between WTI and other crude markets means the WTI-based gross gasoline margin increases more and faster. During November and December, the wholesale price of gasoline actually fell below the price of crude oil (measured by volume) paid by many refiners; not a financially sustainable situation for refiners in the long term.

So, how could refiners afford to make gasoline with those margins? Throughout 2008, gross distillate fuel margins were strong even as gross gasoline margins were weak, which encouraged refiners to modify their operations to make more distillate and less gasoline from the same crude oil. Refinery maintenance in January 2009 further contributed to a reduction in the supply of gasoline. As supply fell relative to demand, gross gasoline margins increased in 2009, increasing retail gasoline prices at the same time.

In summary, gasoline prices have been rising both because of rising crude oil prices and because gasoline margins have increased since late December. Gasoline prices through the spring of 2009 will continue to depend on gross gasoline margins resulting from the gasoline supply/demand balance and on overall crude oil market conditions. However, as long as oil inventories at Cushing remain very high, the NYMEX WTI price you are likely to hear about in the press may remain a misleading indicator.

Residential Heating Fuel Prices Sink Lower
Residential heating oil prices decreased for the sixth week in a row during the period ending February 23, 2009. The average residential heating oil price dove 7.5 cents per gallon lower last week to reach 223.3 cents per gallon, attaining a mark 122.8 cents per gallon less than this same time last year. Wholesale heating oil prices plunged 10.5 cents per gallon to reach 130.0 cents per gallon, 156.3 cents per gallon lower than the same period last year.

The average residential propane price dropped 1.7 cents per gallon from last week to reach 229.3 cents per gallon. This was a reduction of 28.7 cents from the 258.0 cents per gallon average for this same time last year. Wholesale propane prices fell 7.5 cents per gallon, shrinking from 84.6 cents to 77.1 cents per gallon. This was a decrease of 100.3 cents from the February 25, 2008 price of 177.4 cents per gallon.

Gasoline and Diesel Prices Slide
After three weeks of upward movement, the national average price for regular gasoline dropped 5.5 cents to 190.9 cents per gallon, 122.1 cents below the price a year ago. On the East Coast, the price slipped 3.8 cents to 191.2 cents per gallon. In the Midwest, the price dropped the most of any region, tumbling 9.8 cents to 180.8 cents per gallon. The average price on the Gulf Coast decreased to 178.5 cents per gallon, the lowest in the country. The price drop of 1.8 cents in the Rocky Mountains was the smallest of any region, bringing the price to 180.1 cents per gallon. The price on the West Coast slipped 2.3 cents to 222.1 cents per gallon—once again the highest of any region. The average price in California dropped 3 cents to 226.1 cents per gallon.

For the sixth week in a row, the national average price of diesel fuel went down. Prices declined throughout the country with the national average dropping 5.6 cents to 213.0 cents per gallon, 142.2 cents below last year. The price on the East Coast decreased 5.1 cents to 219.9 cents per gallon, 140.9 cents less than a year ago. The Midwest had the largest drop and the lowest average of any region; the price there slumped 6.6 cents to 207.1 cents per gallon. The price in the Gulf Coast fell 5.9 cents to 207.4 cents per gallon, 143.6 cents lower than last year. The Rocky Mountain price dipped 2.5 cents to 215.8 cents per gallon. Although the price on the West Coast remained the highest among the major regions, at 223.8 cents per gallon, it was 137.1 cents lower than a year ago. The average price in California slipped 4.3 cents to 221.9 cents per gallon.

Propane Inventories Post Moderate Decline
Following the largest stockdraw of the season, propane inventories posted a more moderate 0.6 million-barrel decline last week and settled at an estimated 39.4 million barrels as of February 20, 2009. Regional activity was mixed last week, with inventories in the East Coast and the combined Rocky Mountain/West Coast regions relatively unchanged. This compares with the Midwest where inventories reported an unexpected gain of 0.4 million barrels last week, while inventories in the Gulf Coast posted a decline of nearly 1.1 million barrels during this same period. Propylene non-fuel use inventories fell by 0.1 million barrels, accounting for a lower 6.9 percent share of total propane/propylene inventories, compared with the prior week’s 7.1 percent share.

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