For those that follow my blog you know that I explained back on December 5, 2014 how the real price of gasoline is determined, by the RBOB futures market.
The price of gasoline is supported by the price of oil. The US is swimming in oil, we have a major oil storage problem. On Wednesday each week the U.S. Energy Information Administration releases the weekly crude oil inventories. This week the forecast was for 4 million barrels in storage, instead we actually had 10.3 million barrels. We have a crude oil glut and just can’t seem to turn it off.
Based on just a little bit of math it’s real easy to see that the refiners are making a ton of money on the spread between the price of oil vs. the price of gas (RBOB). Here are the numbers:
December 5, 2014 WTI Oil $65.89 RBOB Gas $1.78
March 6, 2015 WTI Oil $49.84 RBOB Gas $1.88
In the last 90 days oil has dropped 24%, yet the price of gasoline has gone up.
The Gascalc site has an interesting tool that calculates the price of gasoline based upon the price of oil. It says that if oil is at $50/barrel, gas should be $1.64/gallon at the pump. The price at the pump can be $.50 – $.80 higher than RBOB due to shipping costs, gas station profits and all the taxes.
Here are the excuses (reasons) why gas is so high:
- About 7,000 members of the United Steelworks are on strike at various US refineries.
- Refineries usually shut down in the spring to switch to summer gasoline blends, however it usually takes place a little later than this.
- A secret government conspiracy. (I just made this up)
The real reason that gasoline is so expensive is that the refiners have slowed down production, creating an artificially tighter supply of gasoline and are therefore making huge margins on what they are producing.
Isn’t it just great, the price of gasoline continues to drop like a rock? Oil (WTI) futures market has settled into the mid-$50 range and are expected to stay low for quite some time. The RBOB futures (Jan 15) price has now dropped to $1.53,see my story on the price of gasoline.
So now there is another problem, what to do with all the oil and gas being produced and no place to put it. How big is the problem? In the week ending December 5th US inventories of crude oil and gasoline rose by 15.3 million barrels, the expected amount was only 800,000 barrels. The US now produces almost 9 million barrels of oil per day, and 80% increase in just the last 6 years.
OPEC oil producers, especially the Saudi’s account for about 40% of worldwide production and are loading up their oil into all the available tankers and sending them out to sea. We now have millions of gallons sloshing around with nowhere to go. Much of this is being stored in hopes that there is a quick fix to the low price dilemma the producers face. Here in the US producers have already maxed out tank storage and are filling up rail cars. China has been taking advantage of this reduction and is also stockpiling all the oil they can.
On a temporary basis this is probably fine, but pretty soon we’ll run out of rail tank cars, ships and storage facilities.
Any suggestions on where to put all of this “liquid gold”?
Gasoline prices have been falling almost every day now. As of the date of this posting AAA reports the national average price for gasoline is $2.71/gal. A year ago the average was $3.52/gal. So who actually determines the price for gasoline and how can you predict what the future price?
The actual price of gasoline is mostly determined by both the price of oil and more specifically the RBOB futures. RBOB is a futures market benchmark that is traded on the New York Mercantile Exchange, the CME Group’s Globex and ClearPort electronic trading platforms. RBOB stands for “Reformulated gasoline Blend stock for Oxygen Blending”, you and I just call it gasoline. A single futures contract of RBOB represents 42,000 of gasoline delivered to the port of New York in a future month. RBOB contains 10% ethanol and is prepared so that a purchaser can get another 10% ethanol added right at the point of delivery. The price of RBOB is quoted in US dollars. A strong dollar tends to lower the price of oil and gasoline. The US dollar is on a real up trend compared to all other world currencies.
The above futures chart shows the trading history of RBOB since September 2014. Today “front month” contract (January 2015 delivery) is about $1.78/gal. If you look at the RBOB futures contract price for January – June 2015 you’ll see that at the moment the market thinks we’ll have really cheap gas for the next 6 months. Of course, the price of RBOB could become quite volatile based on the price of oil and geo-political events. But for now we’ll enjoy it.
Now that you know the core cost of gasoline you can start determining whether your local area is giving you the best deal. There are places in Oklahoma currently selling gas for $1.99/gal, our local price here in Florida is $2.69 and seems to drop every few days. Keep in mind that the “costs” of your gasoline includes taxes, transportation costs and retail profits. I can already tell that our local price of $2.69 will continue to drop before January to possibly the $2.40 – $2.50/gal range.