According to the US Energy Information Administration (EIA), on a national level the main reason for movements in gasoline prices is often changing crude oil prices. Crude oil acquisition is the main cost in producing gasoline, and changes in crude oil prices, along with changes in gasoline market conditions, drive changes in spot and retail gasoline prices. EIA estimates that at current prices, approximately 55% of the retail price of gasoline is attributable to the cost of crude oil. However, at the regional level, several factors other than falling crude prices are influencing regional wholesale gasoline spot prices and retail gasoline prices.
Recent EIA analysis has shown that Brent crude oil prices have more influence on US spot gasoline prices than do changes in West Texas Intermediate (WTI) crude oil prices. The prices of Brent crude oil has fallen by 57.8%, near its lowest price level in six years, reaching US$115/bbl on 19 June 2014. US gasoline prices have declined as well, with spot gasoline prices in New York Harbor falling 54.7%.
Other factors being equal, a US$1/bbl change in the price of crude oil is completely passed through to the spot price of gasoline as a 2.4 cent/gal. change. EIA research and analysis has also shown that changes in spot gasoline prices have a consistent and predictable effect on changes in retail gasoline prices. However, factors other than crude oil prices also have an effect on spot gasoline prices and thus retail gasoline prices.
Spot gasoline prices account for global and local supply/demand conditions for gasoline at the prevailing crude oil price, including inventories, demand expectations, refinery outages, refining costs, and refining profits. Currently, high inventories are a major influence on regional spot gasoline prices. Inventory builds at this time of year are common. Inventories build in anticipation of seasonal refinery maintenance and because of lower demand during the winter.
In addition, the current contango structure of the gasoline market (future prices are higher than current prices) is encouraging inventory builds. High inventories of gasoline can place additional downward pressure on gasoline spot prices regardless of changes in prices. Total motor gasoline inventories in all PADDs exceeded the five year averages from 26 December through 9 January. As of 16 January, total US gasoline inventories were 240.9 million bbls, 10.7 million bbls higher than the five year average and the highest level since 2011.
As noted in EIA’s recent study, the US Gulf Coast becomes increasingly long gasoline in late fall/early winter, and USGC spot gasoline prices decline to make it economic to supply more distant markets, such as Asia. After returning from refinery maintenance season in October, PADD 3 (Gulf Coast) refineries increased utilisation from 87% for the week ending 17 October to 95.9% for the week ending 2 January, dropping back to 87.7% in the week ending 16 January. Increased refinery runs and lower seasonal demand have caused PADD 3 total motor gasoline inventories to build by 9.5 million bbls since 10 October. High runs and increasing inventories have weighed on USGC gasoline prices, leading to lower prices compared to New York Harbour and Singapore, respectively. Lower spot gasoline price in the region, where average regular retail prices have continued to decline compared with the US average.
Rapidly building inventories and high refinery runs during a period of lower demand have also pressured spot gasoline prices downward in the Midwest (PADD 2). Midwest refinery utilisation averaged over 97% in December, causing Midwest gasoline more than inventories to build by 10 million bbls from late November through early January. As a result during the past two weeks, spot prices in Chicago averaged 6 cents and 20 cents lower than gasoline prices on the Gulf Coast and in New York Harbour, respectively. The market conditions pushing Chicago gasoline spot prices lower have also resulted in lower retail prices in the Midwest. PADD 2 average retail prices for a gallon of regular gasoline are typically 7 – 10 cents lower than the US average in January; however, with the decline in spot prices flowing though the retail level, that discount has increased to as much as 24 cents below the US average.
Refinery outages, both planned and unplanned, can also affect regional spot gasoline prices. Though not yet evident in retail prices, recent planned and unplanned refinery outages in the Gulf Coast and Midwest have raised gasoline spot prices in those regions. Midwest and Gulf Coast spot prices have increased, by 26 cents/gal. and 10 cents/gal., respectively, since the beginning of last week. However, these increases have not yet passed through to retail prices.
The retail price of gasoline is also determined by local market conditions. The most significant are federal, state and local taxes, and supply and distribution costs.
Adapted from a press release by Emma McAleavey.
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