According to the US Energy Information Administration (EIA), the US average retail price for regular gasoline was US$ 3.06/gal. at the beginning of this week, US$ 0.64/gal. lower than the June average price and the lowest average price for any week since December 2010. Falling crude oil prices have been largely responsible for the decline in retail gasoline prices. Typical seasonal declines in gasoline crack spreads, the difference between the wholesale price of gasoline and the crude oil price, have also contributed to falling pump prices. Current market prices and conditions indicate that a US average retail price below the symbolic US$ 3/gal. mark is possible in the coming weeks.
EIA’s survey is consonant with survey results reported by AAA, which cited an average regular grade gasoline price on Monday of less than US$ 3/gal. at 55% at US stations. GasBuddy.com also reported early week prices of just over US$ 3/gal.
The spot price for North Sea Brent crude oil, which US petroleum product prices generally track, has fallen by US$ 24/bbl from the 2014 monthly average peak of US$ 112/bbl in June. As of 24 October the monthly average Brent spot price was US$ 88/bbl. The US$ 24/bbl decline in price equates to approximately US$ 0.57/gal.
Brent crude oil prices have declined because of a weakening outlook for global oil demand growth, the return to the market of previously disrupted Libyan crude oil production, and continued growth in US tight oil production. Brent prices are now the lowest they have been since late 2010, before violence in Libya and other areas in the Middle East and North Africa disrupted significant volumes of crude oil supply from the global market.
In addition to falling crude oil prices, easing wholesale gasoline market conditions have contributed to lower retail prices, as indicated by falling gasoline crack spreads. The gasoline crack spread is calculated as the difference between the price of gasoline for prompt delivery, represented by the Nymex futures price for reformulated blendstock for oxygenate blending (RBOB), a petroleum component that is blended with ethanol to make finished gasoline, and the Brent crude oil spot price. The gasoline crack spread has fallen by about US$ 0.20/gal. from its June level of US$ 0.38/gal. to an average of US$ 0.18/gal. in October. This year’s crack spread decline is similar to the average June-October decline of US$ 0.21/gal. observed from 2009 – 2013, and it reflects typical seasonal factors such as declining gasoline consumption and the switch to winter grade gasoline.
The EIA reported that the US$ 0.57/gal. decline in Brent crude oil price combined with the US$ 0.20/gal. decline in the gasoline crack spread has resulted in an October average wholesale gasoline price that is approximately US$ 0.77/gal. lower than the June price. Because US average retail prices have declined US$ 0.64/gal. and because changes in the wholesale gasoline price tend to be fully passed through to retail prices with a lag, all other market factors constant, retail gasoline prices are likely to fall further in the coming weeks.
From 2009 to 2013, the spread between the US average retail price for regular gasoline and the wholesale price for regular gasoline, as represented by the front month Nymex RBOB contract, has averaged US$ 0.68/gal. This spread typically peaks in early autumn before moving back in line with its annual average during November. On 24 October, the Nymex RBOB contract for November delivery closed at US$ 2.18/gal., leaving the retail RBOB spread at US$ 0.88/gal. However, without further changes to Brent crude oil prices and gasoline crack spreads, the wholesale retail price spread could be expected to compress a level closer to its historical average as the decline in wholesale price is passed through to retail prices. With such a change, US average retail prices could move below US$ 3/gal. for the first time since December 2010.
Although US average retail prices remain above US$ 3/gal., the PADD 3 (Gulf Coast) average retail price is already well below that level, averaging US$ 2.83/gal. as of 27 October. Gasoline prices in different regions of the country vary, because of localised supply and demand conditions, differences in gasoline quality specifications, notably those in California, and state and local gasoline taxes. Retail prices on the Gulf Coast are often the lowest in the country because the region is home to approximately half of US refining capacity and produces much more gasoline than it consumes locally. The Gulf Coast also generally has low taxes in gasoline compared to other locations. Conversely, with relatively high tax rates and more restrictive gasoline specifications that are more expensive to produce, PADD 5 (West Coast) average prices are often the highest in the country. The average retail price on the West Coast was US$ 3.32/gal. on 27 October. Additionally, while prices have been falling across most of the country, some areas have experienced increasing prices. These areas include the upper Midwest, where gasoline supplies have been reduced because of unplanned refinery outages. The tightening supplies contributed to a US$ 0.14/gal. increase in the retail price of regular gasoline in Minnesota over the past week, to an average of US 3.09/gal. as of 27 October.
Adapted from a press release by Emma McAleavey.
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