Gas prices expected to soar. What gives?
Gas prices will rise dramatically in the near term, analysts predict. Many attribute it to a rise in oil prices, but the gas prices spike has more to do with gasoline fundamentals, writes Styles.
Which Oil Price to Watch?
Some economists and consumers are bracing for a sharp uptick in gasoline prices, because the price of crude oil has shot up by $10 per barrel in the last month. Except that it hasn’t, at least not if we’re talking about the global price of crude oil that’s factored into the price of the petroleum products sold in much of the US, especially along the coasts.Skip to next paragraph
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The global oil market, reflected in the price of UK Brent crude, is only up about $5 per barrel this month, mainly due to the situation in Egypt. A big part of the jump in domestic oil prices reflects the closing of a historically anomalous gap as US oil moves back into line with the rest of the world.
Such an increase in oil prices does not automatically herald a rise in gasoline prices, especially if it mainly erases a discount that benefited refiners in one region of the country. Moreover, gasoline and crude oil as commodities move in separate markets, linked but not in lock-step. Over the medium-to-longer term they must clearly be connected, but in the short term each responds to distinct forces of supply, demand, inventories and expectations.
After Widening for Two Years, A Crucial Gap Closes
Starting in 2011, West Texas Intermediate (WTI) crude, the main US oil benchmark, traded at an increasingly deep discount to Brent, a North Sea grade that was Europe’s main oil benchmark, and more recently the world’s. For decades, these two crudes had traded near parity, plus or minus a buck or two a barrel. Several factors changed that. The biggest was the rapid growth of production from unconventional sources in the middle third of North America: shale oil and upgraded oil sands crude. From West and South Texas to North Dakota and Alberta, Canada a wave of new oil overwhelmed existing pipeline capacity, some of which was pointed in the opposite direction to carry imported crude into the mid-continent.
The enormous tank farms at Cushing, OK began to fill up. That’s a crucial part of the story, because Cushing is the principal settlement point of the WTI futures contract. The more crude that arrived at Cushing without being needed farther north or provided an exit to the south, the higher inventories rose and the more depressed the WTI price became, relative to Brent. Nothing like that lasts forever in a highly competitive industry. At a $20/bbl discount, companies pursued every possible avenue for getting oil from Cushing to the Gulf, including building new pipelines and reversing existing ones, while using rail and even trucks in the interim. This amazing episode is nearing its end, and traders are giving up on it as an opportunity for profit.