Scroll over labels below to see different charts. Retail Prices (Cents Per Gallon) Retail Prices Change From Last 02/02/09 Week Year Gasoline 189.2 5.4 -108.6 Diesel Fuel 224.6 -2.2 -103.4 Heating Oil 239.0 -1.0 -91.6 Propane 232.3 -0.1 -24.0 Spot Prices (Cents Per Gallon*) Spot Prices Change From Last 01/30/09 Week Year Crude Oil WTI 41.73 -3.39 -47.30 Gasoline (NY) 131.0 14.1 -91.4 Diesel Fuel (NY) 144.0 -0.3 -101.7 Heating Oil (NY) 143.7 -1.1 -101.5 Propane Gulf Coast 73.0 2.5 -71.5 *Note: Crude Oil WTI Price in Dollars per Barrel. Stocks (Million Barrels) Stocks Change From Last 01/30/09 Week Year Crude Oil 346.1 7.2 46.1 Gasoline 220.2 0.3 -7.3 Distillate 142.6 -1.4 15.5 Propane 44.574 -2.913 6.081

Released on February 4, 2009
(Next Release on February 11, 2009)

The Dance Between Crude Oil and Retail Gasoline Prices

The relationship between crude oil and retail gasoline prices is similar to dancers on the reality show “So You Think You Can Dance.” On that show, the contestants dance with a partner, but also do solo numbers. So, too, do crude oil and retail gasoline prices seemingly move in tandem at times, but at other times seem to be disconnected. What is the relationship between crude oil prices and retail gasoline prices? It’s more complicated than may appear on the surface.

When looking at factors affecting retail gasoline prices, one needs to start by looking at both the crude oil market and the gasoline market. With crude oil the major input in making gasoline, clearly, changes in crude oil prices will affect retail prices. But because of the lag between refining crude oil and the distribution of gasoline to retail stations, changes in retail prices typically lag crude oil price changes by at least a week or two, and often take up to four to eight weeks to see the full impact. Of course, crude oil prices rarely stay relatively constant for that long a period, so sometimes it can get a little confusing in trying to track changes in crude oil prices to changes at the pump.

But it is also important to look at the gasoline market apart from the crude oil market. The supply and demand balance for gasoline is also a major factor in both wholesale and retail gasoline prices, and can sometimes work in the opposite direction of crude oil prices. For example, if refinery operating rates are low (meaning that a relatively smaller percentage of refinery capacity is being used) then the supply of gasoline is being reduced as crude oil inventories may be rising (assuming no change in imports, some additional crude oil could be going into storage rather than processed in refineries). All else being equal, a reduction in gasoline supply would increase wholesale gasoline prices and refinery gross margins (the difference between the price refiners sell gasoline and the cost of the crude oil used in the refinery), and eventually increase pump prices. At the same time, more crude oil entering storage would put downward pressure on crude oil prices. Of course, prices could act in the opposite direction as well, with retail prices going down, even as crude oil prices are increasing. The key is that while crude oil prices can have a large impact on retail prices, sometimes gasoline market factors can mitigate or even reverse that impact.

For example, last month, EIA was getting numerous calls on why retail gasoline prices were increasing over the first part of January (from about $1.68 per gallon on January 5 to almost $1.85 per gallon on January 19) even as crude oil prices were falling (the near-month futures price for crude oil fell from $48.81 per barrel on January 5 to $35.40 per barrel on January 15). There are many reasons why this occurred. First, retail gasoline prices in the first half of January should be compared to the change in crude oil prices during the latter part of December, given the usual lag seen in crude oil price impacts. And, in fact, the near-month futures price for crude oil did increase from $33.87 per barrel on December 19 to $48.81 per barrel on January 5. In this case, it appears that the apparent contradiction in price changes resulted from the lag.

Another reason why retail gasoline prices increased as crude oil prices fell relates to the gasoline refinery margin explained above. During much of December, some refiners were selling gasoline at prices less than the cost of crude oil being purchased at the time. Why would these refiners continue to produce given these circumstances? One reason is that refiners have contracts to supply gasoline and all other products they produce from a barrel of crude oil that must be met regardless of profitability. In addition, refiners have the ability to modify their operations in response to profitability of one product compared to another. During the latter part of 2008, while gasoline gross margins were weak, distillate fuel gross margins were high. EIA data indicate that refiners increased their yield of distillate fuel from a barrel of crude oil to record levels in late 2008. At the same time, they reduced yields of gasoline production. This illustrates how refiners typically respond to market signals indicating the preferences of consumers. In addition, refinery maintenance in January 2009 has contributed to a further reduction in the supply of gasoline. As supply dropped relative to demand, gasoline gross margins have returned to positive territory, putting some upward price pressure on retail gasoline prices.

As the first two weeks of January illustrate, there could be many different reasons why crude oil and retail gasoline prices may appear to be going in opposite directions. The bottom line is that it is important to look at both the crude oil market AND the gasoline market to get a good handle on what is going on with retail gasoline prices.

Residential Heating Fuel Prices Dip Slightly Residential heating oil prices fell for the third consecutive week during the period ending February 2, 2009. The average residential heating oil price decreased 1.0 cent per gallon last week to reach 239.0 cents per gallon, dropping 91.6 cents per gallon lower than this same time last year. Wholesale heating oil prices inched downward by 0.6 cent per gallon to reach 156.4 cents per gallon, which was a decrease of 97.5 cents per gallon compared to the same period last year.

The average residential propane price dipped slightly, ebbing 0.1 cent per gallon lower to reach 232.3 cents per gallon. This was a decrease of 24.0 cents from the 256.3 cents per gallon average for this same time last year. Wholesale propane prices jumped 6.2 cents per gallon higher, rising from 90.2 cents to 96.4 cents per gallon. This was a decrease of 56.8 cents from the February 4, 2008 price of 153.2 cents per gallon.

Gasoline Prices Resume Climb; Diesel Prices Continue to Slip The national average price for regular gasoline increased 5.4 cents to 189.2 cents per gallon. However, the price remained 108.6 cents below a year ago and 222.2 cents below the all-time high set July 7, 2008. Prices rose in all regions of the country with the price on the East Coast moving up 6 cents to 187.6 cents per gallon. In the Midwest, the price increased a nickel to 187 cents per gallon. The average price on the Gulf Coast increased the most of any region, growing by 7.3 cents to 180.2 cents per gallon. Despite an increase of 6.8 cents, the average price in the Rocky Mountains remained the lowest in the Nation at 171.2 cents per gallon. Although the rise of 2.5 cents was the smallest increase among the regions, the price on the West Coast – at 208.2 cents per gallon – remained the highest regional price in the country. In California, the average price rose 1.8 cents to 211.3 cents per gallon.

For the third consecutive week, the national average price of diesel fuel dropped. Over the past 18 weeks (since October 6, 2008), the average price of diesel fuel has increased only once. The latest drop of 2.2 cents brought the national average to 224.6 cents per gallon, 103.4 cents below the price a year ago, and 251.8 cents below the all-time high set July 14, 2008. On the East Coast, the average price slipped 1.9 cents to 232.5 cents per gallon, the highest among the regions. The price in the Midwest dropped the most of any region, falling 3.1 cents to 220.1 cents per gallon. Decreasing 1.3 cents to 218.9 cents per gallon, the average price in the Gulf Coast was the lowest on a regional basis. The price in the Rocky Mountains fell 1.4 cents to 222.9 cents per gallon while the West Coast average decreased 1.6 cents to 230.3 cents per gallon. The average price in California dipped 0.8 cent to 228.8 cents per gallon, but still remained 108.9 cents below last year.

January Stockdraw Below Average The Nation’s primary supply of propane was drawn down by about 11.8 million barrels during January, a volume that was more than 9 percent below the most recent 5-year average of nearly 13 million barrels. Last week saw inventories drop by 2.9 million barrels, with inventories settling at an estimated 44.6 million barrels as of January 30, 2009. Gulf Coast inventories reported the sharpest decline last week that totaled 1.5 million barrels, followed by a 1.3 million-barrel drop in the Midwest. During this same time, East Coast inventories fell by a modest 0.1 million barrels, while the combined Rocky Mountain/West Coast region remained relatively flat. Propylene non-fuel use inventories moved lower by about 0.2 million barrels to account for 8.0 percent of total propane/propylene inventories, up from the prior week’s 7.8 percent share.

Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.