Oil and Gasoline Prices Increase, Spread between Brent and WTI Narrows

From Gary Richards at Mercury News: Gas prices expected to rise soon

Gas prices are back on the rise and could increase by 10 to 15 cents a gallon over the next couple of weeks, analysts say.

The biggest culprit behind the anticipated surge is the price of crude oil, which approached $106 a barrel Friday. That’s up from $97 on July 1. Each $1 increase typically turns into a 2.5-cent hike at the gas station. The average in California is hovering around $4 a gallon, up a few cents over the past week. But the national average reached $3.55 on Friday, seven cents more than a week earlier.

So the national average finally dipped below $3.50 per gallon, but gasoline prices have started increasing again.

Unfortunately we are seeing more refinery problems and gasoline futures are up sharply. From the WSJ: Gasoline Futures Hit Four-Month High After Refinery Glitches

Gasoline futures shot to the highest level in nearly four months Friday, after a series of refinery glitches spurred concerns about the ready availability of fuel supplies.
…
Motiva Enterprises LLC on Wednesday shut a production unit at its Port Arthur refinery in Texas. …

Separately, Phillips reported a production shutdown at its refinery in Ponca City, Okla., after a power outage. The refinery had resumed normal operations by Friday afternoon, a company spokesman said.

Refinery problems often boost gasoline-futures prices as traders rush to the futures market to cover potential shortfalls. If sustained, they can translate to higher prices at the pump.

Oil prices were up this week, with WTI at $105.95 per barrel up from $93.69 three weeks ago, and Brent at $108.81, up from $100.91 three weeks ago.

WTI prices “surged” more than Brent, and the spread between WTI and Brent prices has almost closed.  At one point Brent was selling for about 25% more than WTI (even though they are comparable quality). Now the difference is under 3% (and less than $3 per barrel).

Click on graph for larger image.

Here is an update to the graph that shows the divergence between Brent and Cushing starting in 2011.

Until the gap disappears completely, we still need to use Brent crude prices to forecast U.S. gasoline prices.

Using the calculator from Professor Hamilton, and the current price of Brent crude oil, the national average should be around $3.56 per gallon. That is close to the current level according to Gasbuddy.com, so even if we see a spike in gasoline prices – if crude oil prices stay at this level, and the refinery problems are resolved – gasoline will probably return to the current level.

The following graph is from gasbuddy.com. Note: If you click on “show crude oil prices”, the graph displays oil prices for WTI, not Brent.