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 ...
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?
Same speculators!
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.
http://www.petrostrategies.org/Graphs/Crude_Oil_and_Gasoline_Pump_Prices.htm
Isn’t this just about the time refineries start to retool for the summer time blends and by doing so have to cut production?
I second that. :-)
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.
Ok...stay with me here...
HOW ARE THEY LOSING MONEY IF THEY ARE SELLING AT THE HIGHER RATE ANYWAY!!!
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.
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.
In CA lawmakers are preparing a 12 cents per gallon tax to paper over their wild spending. Oh joy.
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.
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.
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.
Sorry...I have a fever and should stop posting!
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.
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.
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.
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