In January thru March of 2009 consumers witnessed retail gas prices move from an average $1.61 to $1.96, while NYMEX crude futures were range bound with no upward trend. How can this be possible?
Understanding this phenomenon requires knowing what type of oil the NYMEX futures are based. West Texas Intermediate (WTI), a light or sweet crude spec, with delivery at Cushing, OK, is the particular type of oil being traded on NYMEX. Local conditions at this delivery point, as well as larger market trends are mainly what is being reflected in the WTI futures price.
Therefore, the WTI NYMEX futures contract sometimes is not an accurate indicator of retail gas price movements.
There are two key elements in understanding how retail gas is priced. First, WTI is not the only kind of crude oil being refined in the United States to produce gas. Price rises in these other types crude accounted for half of the price increase in gas between January and March.
The other piece of the puzzle is overall supply and demand. Crude is used to make a variety of products. Overall demand for these other products will affect the price of crude and ultimately the price of gas. Gross gasoline margin, the difference between the wholesale (spot) price of gas and the spot price of crude, is the main indicator of divergence between the two markets.
In 2008 gas margins were weak, encouraging refiners to produce higher margin distillate products such as diesel. As supply of gas fell, gross gas margins began to increase in 2009. As a result, retail gas prices increased.
Retail gas prices will continue to depend on gross gas margins in 2009. However, as long as oil inventories at Cushing, OK continue to remain at historically high levels, the NYMEX WTI price may continue to be a misleading indicator for the price of retail gas.
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