Thursday, November 6, 2014

U.S. gasoline prices move with Brent prices this week

U.S. Energy Information Administration  

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.)

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