Falling gasoline prices: the influence of crude oil prices and other factors
by U.S. Energy Information Agency
On a national level, the main reason cited for movements in gasoline prices is often changing crude oil prices. Crude oil acquisition is the main cost in producing gasoline, and changes in crude oil prices, along with changes in gasoline market conditions, drive changes in spot and retail gasoline prices. EIA estimates that at current prices, about 55% of the retail price of gasoline is attributable to the cost of crude oil. However, at the regional level, several factors other than falling crude prices are influencing regional wholesale gasoline spot prices and retail gasoline prices.
Recent EIA analysis has shown that Brent crude oil prices have more influence on U.S. spot gasoline prices than do changes in West Texas Intermediate (WTI) crude oil prices. The price of Brent crude oil has fallen by 57.8%, near its lowest price level in six years, since reaching $115 per barrel on June 19, 2014. U.S. gasoline prices have declined as well, with spot gasoline prices in New York Harbor falling 54.7% (Figure 1).
Other factors being equal, a $1-per-barrel change in the price of crude oil is completely passed through to the spot price of gasoline as a 2.4-cent-per-gallon change. EIA research and analysis has also shown that changes in spot gasoline prices have a consistent and predictable effect on changes in retail gasoline prices. However, factors other than crude oil prices also have an effect on spot gasoline prices and thus retail gasoline prices.
Spot gasoline prices account for global and local supply/demand conditions for gasoline at the prevailing crude oil price, including inventories, demand expectations, refinery outages, refining costs, and refining profits. Currently, high inventories are a major influence on regional spot gasoline prices. Inventory builds at this time of year are common. Inventories build in anticipation of seasonal refinery maintenance and because of lower demand during the winter.
In addition, the current contango structure of the gasoline market (future prices are higher than current prices) is encouraging inventory builds. High inventories of gasoline can place additional downward pressure on gasoline spot prices regardless of changes in crude prices. Total motor gasoline inventories in all Petroleum Administration for Defense Districts (PADDs) exceeded the five-year averages from December 26 through January 9. As of January 16, total U.S. gasoline inventories were 240.9 million barrels, 10.7 million barrels higher than the five-year average and the highest level since 2011 (Figure 2).
As noted in EIA’s recent study, the U.S. Gulf Coast becomes increasingly long gasoline in late fall/early winter, and USGC spot gasoline prices decline to make it economic to supply more distant markets, such as Asia. After returning from refinery maintenance season in October, PADD 3 (Gulf Coast) refineries increased utilization from 87% for the week ending October 17 to 95.9% for the week ending January 2, dropping back to 87.7% in the week ending January 16. Increased refinery runs and lower seasonal demand have caused PADD 3 total motor gasoline inventories to build by 9.5 million barrels since October 10. High runs and increasing inventories have weighed on USGC gasoline prices, leading to lower prices compared to prices in New York Harbor and Singapore. In December, gasoline prices on the Gulf Coast averaged 21 cents and 23 cents below prices in New York Harbor and Singapore, respectively (Figure 3). Lower spot gasoline prices on the Gulf Coast are putting downward pressure on retail gasoline prices in the region, where average regular retail prices have continued to decline compared with the U.S. average.
Rapidly building inventories and high refinery runs during a period of lower demand have also pressured spot gasoline prices downward in the Midwest (PADD 2). Midwest refinery utilization averaged over 97% in December, causing Midwest gasoline more than inventories to build by 10 million barrels from late November through early January. As a result during the past two weeks, spot prices in Chicago averaged 6 cents and 20 cents lower than gasoline prices on the Gulf Coast and in New York Harbor, respectively. The market conditions pushing Chicago gasoline spot prices lower have also resulted in lower retail prices in the Midwest. PADD 2 average retail prices for a gallon of regular gasoline are typically 7-10 cents lower than the U.S. average in January; however, with the decline in spot prices flowing through to the retail level, that discount has increased to as much as 24 cents below the U.S. average (Figure 4).
Refinery outages, both planned and unplanned, can also affect regional spot gasoline prices. Though not yet evident in retail prices, recent planned and unplanned refinery outages in the Gulf Coast and Midwest have raised gasoline spot prices in those regions. Midwest and Gulf Coast spot prices have increased, by 26 cents per gallon and 10 cents per gallon, respectively, since the beginning of last week. However, these increases have not yet passed through to retail prices.
The retail price of gasoline is also determined by local market conditions. The most significant are federal, state, and local taxes, and supply and distribution costs.
Gasoline and diesel fuel prices continue to fall, diesel now below $3 per gallon
The U.S. average price for regular gasoline fell seven cents from the week prior to $2.07 per gallon as of January 19, 2015, $1.23 per gallon less than the same time last year. The West Coast price decreased 11 cents to $2.38 per gallon, while the East Coast price fell ten cents to $2.16 per gallon. The Rocky Mountain price was down eight cents to $1.91 per gallon. The Gulf Coast price declined seven cents to $1.84 per gallon, and the Midwest price was down three cents to $1.92 per gallon.
The U.S. average price for diesel fuel decreased 12 cents from last week to $2.93 per gallon, the first time below $3 per gallon since September 2010, and 94 cents per gallon lower than the same time last year. The Rocky Mountain price led the declines, down 14 cents to $2.88 per gallon. The Midwest, Gulf Coast, East Coast and West Coast prices each fell 12 cents, to $2.89 per gallon, $2.84 per gallon, $3.02 per gallon, and $3.01 per gallon, respectively.
Propane inventories fall
U.S. propane stocks decreased by 3.6 million barrels last week to 71.2 million barrels as of January 16, 2015, 36.0 million barrels (102.0%) higher than a year ago. Midwest inventories decreased by 1.6 million barrels and Gulf Coast inventories decreased by 1.3 million barrels. East Coast inventories decreased by 0.4 million barrels and Rocky Mountain/West Coast inventories decreased by 0.2 million barrels. Propylene non-fuel-use inventories represented 5.9% of total propane inventories.
Residential propane price increases while heating oil price decreases
As of January 19, 2015, residential heating oil prices averaged less than $2.84 per gallon, almost 8 cents per gallon lower than last week, and $1.22 per gallon less than last year’s price for the same week. Wholesale heating oil prices averaged $1.76 per gallon, 3 cents per gallon lower than last week and nearly $1.45 per gallon lower when compared to the same time last year.
Residential propane prices averaged less than $2.39 per gallon, almost 4 cents per gallon higher than last week, and 57 cents per gallon less than the price at the same time last year. The average wholesale propane price increased by 5 cents per gallon this week to 62 cents per gallon, $1.49 per gallon lower than the January 20, 2014 price.
Econintersect editor note: Follow the latest national gasoline price data weekly in GEI Features, which includes Gas Buddy search for best local prices anywhere in the U.S.