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Crude oil is getting cheaper so why isn't gas?
AP/Yahoo ^ | 15 Feb 09 | John Porretto, Jennifer Malloy, Ryan Nakashima

Posted on 02/15/2009 9:59:43 AM PST by saganite

NEW YORK – Crude oil prices have fallen to new lows for this year. So you'd think gas prices would sink right along with them.

Not so.

On Thursday, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. On Friday gas went a penny higher.

To drivers once again grimacing as they tank up, it sounds like a conspiracy. But it has more to do with an energy market turned upside-down that has left gas cut off from its usual economic moorings.

The price of gas is indeed tied to oil. It's just a matter of which oil.

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

(Excerpt) Read more at news.yahoo.com ...


TOPICS: Business/Economy; News/Current Events; US: Texas
KEYWORDS: bhoenergy; economy; energy; gasoline; gasprices; oil
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1 posted on 02/15/2009 9:59:43 AM PST by saganite
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To: saganite

This is an interesting story since I’ve been wondering about this myself. I thought maybe taxes had gone up in my state but the article gives a pretty good explanation why West Texas Intermediate crude isn’t really a good benchmark for gas prices right now.


2 posted on 02/15/2009 10:02:14 AM PST by saganite (What would Sully do?)
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To: saganite

I love PR and Marketing.

Move the sheep along.


3 posted on 02/15/2009 10:03:31 AM PST by Tempest (Greed is putting money before PEOPLE.)
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To: saganite
This is the first time I've heard this - in addition to the first time in recent memory I've seen the MSM defend oil companies.

Oil is a fungible commodity - I didn't think it mattered who or where it was pumped.

4 posted on 02/15/2009 10:03:33 AM PST by skeeter
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To: saganite

0’pinhead mentioned this the other nite—said the refineries were cutting back for the good of us all and that was causing the increase—guess he already milked this topic for all he could get and take credit for the price coming down (temporarily) from 4$ per....


5 posted on 02/15/2009 10:04:09 AM PST by gunnyg
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To: saganite
A bit of common sense answers the question.....

When gas prices begin to rise sharply, many distributors (not refineries, but distributors) will contract to buy gasoline at a certain price as a hedge against future price spikes. Airlines do this as well.

If your local gasoline distributor has done this, they are more than likely still paying what is now an inflated price for gasoline. They contracted to buy it at a certain price, regardless of whether the market price is higher or lower.

When oil prices fall, they are stuck with having to pay higher costs. They took a calculated risk and it didn't work out. Just as there were market forces that raised the prices to begin with, there are market forces keeping the prices where they are today. Sorry - no conspiracies.

6 posted on 02/15/2009 10:06:25 AM PST by TexasNative2000 (Obamamania - not terminal, but, sadly, it does have to run its four-year course.)
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To: saganite
Something is completely wrong here.

Crude oil is always given as an example of a fungible commodity.

.

7 posted on 02/15/2009 10:07:35 AM PST by Seaplaner (Never give in. Never give in. Never...except to convictions of honour and good sense. W. Churchill)
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To: saganite

Because refiners are bottlenecking supply.


8 posted on 02/15/2009 10:08:14 AM PST by mysterio
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To: skeeter
Skeeter, ya beat me.

(Great minds...)

.

9 posted on 02/15/2009 10:09:30 AM PST by Seaplaner (Never give in. Never give in. Never...except to convictions of honour and good sense. W. Churchill)
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To: saganite

It doesn’t matter who tells what lie about this being a free market product, which natural disasters occur, or what misery or threat the country is in, the oil companies will make record profits.


10 posted on 02/15/2009 10:10:57 AM PST by nufsed
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To: TexasNative2000

This would be easier to believe if my local gas station owner wasn’t out there on his ladder changing prices the very moment the price of oil on the global sport market makes the slightest of moves upward.


11 posted on 02/15/2009 10:11:05 AM PST by skeeter
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To: TexasNative2000

I don’t think distributers have hedged in my area since the price moved down over the last few months and has been increasing just recently. Your explanation would assume they hedged at a higher price when the market was moving down. Not too likely IMHO.


12 posted on 02/15/2009 10:12:08 AM PST by saganite (What would Sully do?)
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To: Seaplaner

:) Like I said, oil being a commodity, I’ve never heard this explanation before. Gas has always seemed to track the per barrel price of oil pretty closely.


13 posted on 02/15/2009 10:12:21 AM PST by skeeter
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To: Seaplaner
Crude oil is always given as an example of a fungible commodity.

Read the source you posted. It has to be the dsame type of crude.

14 posted on 02/15/2009 10:12:44 AM PST by Gondring (Paul Revere would have been flamed as a naysayer troll and told to go back to Boston.)
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To: saganite

This reads like a press release from the petroleum industry.
It sounds like something written to counter the many other stories pointing out that oil companies have intentionally cut the ratio of gasoline versus other products produced from a barrel of oil because they were unhappy with retail prices around $1.50 a gallon or less.


15 posted on 02/15/2009 10:13:01 AM PST by Iron Munro (Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.)
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To: skeeter; Seaplaner
Here's what the article says about fungibility:
Historically, West Texas International crude has cost more. So nobody bothered building the necessary pipelines to carry it beyond the nearby refineries in the Midwest, parts of Texas and a handful of other places.

Now that the premium oil is suddenly very inexpensive, refiners elsewhere can't get their hands on it.

"It's so cheap," said Lynn Westphall, the senior VP of external affairs at San Antonio-based Tesoro, which owns a half dozen refineries on the West Coast and Hawaii. "But you can't just build a pipeline to everywhere. We know we can't get it."


16 posted on 02/15/2009 10:13:09 AM PST by Yardstick
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To: saganite

All depends on the effective dates and expiration dates of the contracts and the benchmark price agreed to.


17 posted on 02/15/2009 10:13:47 AM PST by TexasNative2000 (Obamamania - not terminal, but, sadly, it does have to run its four-year course.)
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To: Seaplaner

I had to excerpt the article but there’s some good info in the article as to why WTI crude is uncoupled from other oil prices. Go to the article and read the whole thing.


18 posted on 02/15/2009 10:14:19 AM PST by saganite (What would Sully do?)
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To: skeeter
Gas has always seemed to track the per barrel price of oil pretty closely.

Not really. If you look at last year's increase in prices, crude went up far more than gasoline. If they tracked together, we would have reached about $6/gallon of gasoline.

Then, as the price of crude dropped, people whined that gasoline didn't drop as quickly. At the end, they came back together, but people just want to get something for nothing.

19 posted on 02/15/2009 10:14:25 AM PST by Gondring (Paul Revere would have been flamed as a naysayer troll and told to go back to Boston.)
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To: Gondring

Interesting, Got sources? I’d like to understand this better.


20 posted on 02/15/2009 10:15:55 AM PST by skeeter
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To: TexasNative2000
Good post. I also seem to remember that after oil prices began sliding in January, oil prices for February delivery remained on the high side for some reason. Gasoline sold today is likely based on this February price, while over the longer term (the next few months) these prices will likely ease.
21 posted on 02/15/2009 10:17:44 AM PST by Alberta's Child (I'm out on the outskirts of nowhere . . . with ghosts on my trail, chasing me there.)
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To: TexasNative2000

Let me get this straight...

If a wholesaler gambles that prices will go up, and he locks in his price today and the price goes up, he gets to sell at the higher price and pocket the profit?

If a wholesaler gambles that the prices will go up, and he locks in his price today and the price goes DOWN, he gets to sell at the higher price anyway?

Either you and I are fools for believing this, or you and I are fools for allowing it to be true.

which kind of fool do you think it is?


22 posted on 02/15/2009 10:17:51 AM PST by mamelukesabre
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To: saganite

Same speculators!


23 posted on 02/15/2009 10:20:59 AM PST by Logical me (Oh, well!!!)
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To: skeeter
Try gasbuddy.com. Here's a snapshot I made last fall...


24 posted on 02/15/2009 10:29:39 AM PST by Gondring (Paul Revere would have been flamed as a naysayer troll and told to go back to Boston.)
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To: saganite

Gas prices may be tied to crude prices on the up side, but there is absolutely no reason that the gasoline prices must be tied to crude on the down side.


25 posted on 02/15/2009 10:29:50 AM PST by Eva (CHANGE- the post modern euphemism for Marxist revolution.)
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To: Gondring
Can you explain this?

http://www.petrostrategies.org/Graphs/Crude_Oil_and_Gasoline_Pump_Prices.htm

26 posted on 02/15/2009 10:30:24 AM PST by skeeter
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To: saganite

Isn’t this just about the time refineries start to retool for the summer time blends and by doing so have to cut production?


27 posted on 02/15/2009 10:31:02 AM PST by Las Vegas Ron (Obama says we should listen to our enemies, but not to Rush)
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To: Seaplaner; All; saganite
I had to excerpt the article but there’s some good info in the article as to why WTI crude is uncoupled from other oil prices. Go to the article and read the whole thing.

I second that. :-)

28 posted on 02/15/2009 10:31:13 AM PST by Gondring (Paul Revere would have been flamed as a naysayer troll and told to go back to Boston.)
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To: mamelukesabre
If a wholesaler gambles that prices will go up, and he locks in his price today and the price goes up, he gets to sell at the higher price and pocket the profit?

If a wholesaler gambles that the prices will go up, and he locks in his price today and the price goes DOWN, he gets to sell at the higher price anyway?

Stay with me here.....

If ABC Distributor contracts to buy gasoline at $1.80/gallon and plans to distribute it at $2.10 a gallon, he buys at that price whether the market price goes up or down. If it goes UP, he stands to profit because his cost of goods sold is fixed and below market.

If the price goes DOWN, his cost of goods sold is fixed at $1.80 a gallon and he is in a bad spot. Since the costs were so volatile a couple of quarters ago, almost all distributors did this, so they are all locked in.

No foolishness involved. It's the market. Do some research on Southwest Airlines and see how much money they lost last quarter for this exact reason.

29 posted on 02/15/2009 10:31:59 AM PST by TexasNative2000 (Obamamania - not terminal, but, sadly, it does have to run its four-year course.)
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To: TexasNative2000

Ok...stay with me here...

HOW ARE THEY LOSING MONEY IF THEY ARE SELLING AT THE HIGHER RATE ANYWAY!!!


30 posted on 02/15/2009 10:33:24 AM PST by mamelukesabre
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To: skeeter

Yes...you have to zero them together and check the scale. It’s a bit of an illusion, as the crude is on the bottom, so you don’t notice that as much that the two lines are closer together in the right portion of the graph than the left portion.


31 posted on 02/15/2009 10:33:32 AM PST by Gondring (Paul Revere would have been flamed as a naysayer troll and told to go back to Boston.)
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To: saganite

Very interesting, thanks. Some people who follow crude oil futures have been wondering about these disparities recently, and this seems like a good explanation.

It kind of burns me up that Hugo Chavez and Co. are getting more for their oil than Texas. The market should eventually deal with such discrepancies, but in the midst of a financial meltdown with discrepancies that may not last, nothing much is likely to be done, as the article indicates.

Especially with The Destoyer in the Whitehouse, with his crew of California moonbats in charge of our energy policy.


32 posted on 02/15/2009 10:34:53 AM PST by Cicero (Marcus Tullius)
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To: Gondring

In CA lawmakers are preparing a 12 cents per gallon tax to paper over their wild spending. Oh joy.


33 posted on 02/15/2009 10:35:51 AM PST by catbertz
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To: skeeter

Also, look at the bottom graph. Do you not see that they forced a linear regression on data that are not linear? Note that the slope of the data in the right portion of the graph is lower than in the left portion, showing that they tracked at one rate when price-per-barrel of crude was low, but when crude got price, gas didn’t go up proportionally the same.


34 posted on 02/15/2009 10:36:33 AM PST by Gondring (Paul Revere would have been flamed as a naysayer troll and told to go back to Boston.)
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To: saganite

Brent Crude, the other benchmark, is going sideways in the $40/barrel range. That’s a better measure than the quirky figures coming out of Cushing.


35 posted on 02/15/2009 10:37:49 AM PST by NativeNewYorker (Freepin' Jew Boy)
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To: saganite

It is tied to oil, but there are a lot of layers in the production. It can’t fall as fast as it rises because you have the production and transportation costs as well.

For example, let’s say you have a business that sells widgets. To sell widgets, you have a storefront, employees, electricity, etc to keep operations going.

Let’s say that those expenses cost $1.00 per widget. The wholesale cost of a widget costs $.50. You sell the widget for $2.00 to make a $.50 profit per widget. If the wholesale price of the widget goes up to $1.00, in order to continue to maintain the $.50 profit margin, you increase the cost to $2.50/widget.

Now, let’s say the wholesale cost of the widget drops 90% from the $.50 wholesale cost. The retail customer won’t see a 90% decrease in price. If the business continues with its operational model making $.50/widget, the retail price would only fall to about $1.65/widget

The customer doesn’t see the entire drop in price strictly based on the decrease in wholesale cost because the wholesale cost is not the entire part of the expense model. Even if the widget’s wholesale cost was zero, the business would still have to sell the widget for $1.50 to continue to make the $.50/widget profit.


36 posted on 02/15/2009 10:37:58 AM PST by mnehring
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To: skeeter
It’s a bit of an illusion, as the crude is on the bottom, so you don’t notice that as much that the two lines are closer together in the right portion of the graph than the left portion.

Sorry...I have a fever and should stop posting!

37 posted on 02/15/2009 10:38:26 AM PST by Gondring (Paul Revere would have been flamed as a naysayer troll and told to go back to Boston.)
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To: skeeter
Fact is, WTI is artificially depressed right now. Witness the $4.46/bbl contango between the March contract and the April contract. With 34.9 MM bbls in storage at Cushing, per last week's EIA figs, there's just too much crude for the industry to use right now...and it can't be distributed to E and W coast refineries (well, not easily anyway).

This situation, in turn, puts the 'gas crack', i.e. the gross refining margin for making motor gasoline out of whack. From Oct thru mid-Jan, the crack was actually negative, meaning refiners were losing money on every gallono of motor gasoline they produced (the 'heat crack', the margin for producing #2 oil, aka heating oil, aka diesel was nicely positive, though).

Guess what? A negative gas crack cannot last for long; nobody produces for long at a gross loss, and most certainly nobody ramps production upwards when margins are negative.

The gas crack has returned to being WAY positive just now; as always, the market overshoots, and it's done so here. Look out to June or July, though, and you'll see straightaway that this relative overpricing will be correcting itself, too. July crude is $11/bbl over March, while July RBOB gasoline is just 10 cents ( = $4.20/bbl) over March.

In short, the relation between crude pricing and gasoline pricing can get out of whack...for short periods. Within the past 6 months, this relation has been skewed BOTH to the high side AND to the low side. When the oversupply at Cushing gets resolved, which it will, it will in a couple-three months, and once we get past spring maintenance, the relation will normalise once again. Friday, for example, while everyone was watching FRONT crude, March, go up $4.50/bbl, NOBOBY (except pros) was watching the gas crack lose $1.90/bbl in 2nd month April.

Unless the goobermint does something sufficiently stupid, which, given Chu and Browner at the wheel, is unfortunately very likely.

Watch the June and July contracts. They're the indicators of what's going to happen with motor gasoline and its pricing relation to crude.

38 posted on 02/15/2009 10:39:05 AM PST by SAJ
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To: mamelukesabre
No need to yell....

They (the gas distributors) are not losing money. That's why the prices are where they are. They are having to keep the prices up because of their contract costs. If they were selling at $1.55 after buying for $1.80, then they would be losing money.

As for Southwest Airlines, they ARE losing money because they are in such a tight market that their fares must remain competitive, even if it means their fuel expenses take a bigger bite out of their cost allocations.

39 posted on 02/15/2009 10:39:28 AM PST by TexasNative2000 (Obamamania - not terminal, but, sadly, it does have to run its four-year course.)
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To: saganite
I think part of this may be the amount of diesel being produced, as well. The price of diesel here has dropped 60 cents per gallon in the past two weeks. I don't know this for a fact, but I assume the refineries are producing more diesel now and less gasoline.

It would also make sense from the economic point of view. The more it costs to produce and transport produce across country, the higher the price of everything is going to be. I'll bet you that Zero is making forceful suggestions to the refiners to help keep product costs low by lowering transport costs.

40 posted on 02/15/2009 10:39:52 AM PST by MarketR
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To: TexasNative2000

Not to mention the Southwest just took a hosing on the hedges they established mid-last year.


41 posted on 02/15/2009 10:40:20 AM PST by SAJ
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To: SAJ

Thanks. How far in advance of delivery are the contracts typically made?


42 posted on 02/15/2009 10:41:32 AM PST by skeeter
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To: TexasNative2000

That’s not a free market. They should be losing money just like the airlines. The fact that they aren’t proves they are crooks scamming the system.


43 posted on 02/15/2009 10:41:59 AM PST by mamelukesabre
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To: SAJ

Exactly. I’m trying to explain the economic impacts of futures contracts to someone on this forum and it’s a challenge.


44 posted on 02/15/2009 10:42:55 AM PST by TexasNative2000 (Obamamania - not terminal, but, sadly, it does have to run its four-year course.)
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To: MarketR
I'll take that bet. Osamabama will be doing everything possible to **raise** energy prices, not lower them. He can't do much right this minute because of the recession and the concomitant slack/falling demand for energy.

The minute the economy looks like it's even starting to recover, though, just watch: you're going to see a manipulation of energy pricex, via regulation, such as neither you nor this nation have ever seen before.

45 posted on 02/15/2009 10:43:01 AM PST by SAJ
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To: TexasNative2000
Good luck to you on that one, m'FRiend!

Thackney, and Eric in the Ozarks, and Smokin' Joe (and numerous others!) and I have been trying to do this for a couple of years. Some folks -- especially the 'conspiracy' crowd, of which there is no shortage here on FR -- just don't get it, sadly.

46 posted on 02/15/2009 10:44:57 AM PST by SAJ
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To: saganite
Or propane?

Although the wholesale price of propane is down to about half of last year we are still paying this year's prices.

47 posted on 02/15/2009 10:45:01 AM PST by raybbr (It's going to get a lot worse now that the anchor babies are voting!)
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To: mamelukesabre
It's not "scamming the system". It's a very smart and perfectly legal market tactic. Futures contracts create fixed costs. The gas distributors are not getting burned on it this time because they all got caught up in it.
48 posted on 02/15/2009 10:46:21 AM PST by TexasNative2000 (Obamamania - not terminal, but, sadly, it does have to run its four-year course.)
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To: mnehrling

To augment your argument U.S. refineries run close to 100%
capacity. Any one of them going off line will spike
retail prices.

The left won’t allow for building new refineries.

What scare me is the ignorant talk on FR blasitng the oil
companies when the price is really a function of the limits
set by our Government.

Watch for nationalization of oil in the near future.


49 posted on 02/15/2009 10:46:52 AM PST by ChiMark
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To: SAJ
Some folks -- especially the 'conspiracy' crowd, of which there is no shortage here on FR -- just don't get it, sadly.

Word.

50 posted on 02/15/2009 10:47:14 AM PST by TexasNative2000 (Obamamania - not terminal, but, sadly, it does have to run its four-year course.)
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