Crude Oil's Ups and Downs

As crude futures drop, relationship between oil and gasoline prices changes

NEW YORK -- Even as economic indicators show the global demand for fossil fuel is beginning to soften in the wake of Hurricanes Katrina and Rita, oil refiners are seeing the difference between what crude oil costs and what the refined fuel they produce is selling for soar. So noted two separate stories in Friday's Wall Street Journal.

It is too early to say for sure whether the fuel-price spikes that followed [the hurricanes] have pinched oil and gasoline users enough to keep them from buying as much of it as they would normally. But a body of [image-nocss] statistics -- from U.S. gasoline-demand estimates to Chinese toll-booth receipts -- suggests that the soaring demand growth of recent years could be easing substantially, stated one story titled High Prices May Be Damping Fuel Demand.

That decrease in demand could spell some short-term price relief for consumers. Oil traders have recently sold crude-oil futures off sharply, and some analysts are cutting their oil-price forecasts for next year.

On Thursday, oil futures fell for a fifth day running. On the New York Mercantile Exchange, front-month futures settled at $61.36 a barrel, down $1.43, or 2.3%. Futures on gasoline, heating oil and natural gas also fell. For crude it was the lowest settlement since Aug. 3. Crude is still up 41.2% year to date, and 101.8% for the past two years.

Meanwhile in a separate story titled Refiners Profit From a Disconnect', the WSJ said, Storms and supply constraints have disconnected the prices for gasoline and home heating oil from the core value of crude. Benchmark oil futures closed [Thursday] at $61.36 a barrel, down from $69 the day before Hurricane Katrina began its assault on the Gulf Shore. Over that same period, the difference between what crude oil costs and what the refined fuel it produces sold for -- known as the refining margin -- soared.

The margin spiked to $49 a barrel on the Gulf Coast for the week ending Sept. 30, up from $31.58 the prior week, according to data compiled by Credit Suisse First Boston and noted by the WSJ. About 18% of the nation's refining capacity is limping back into production.

As refineries come back on line, refining margins are beginning to ease. But they are still steep on the Gulf Coast, where many of the nation's refineries are located and where storm damage was most severe, analyst Chi Chow of Petrie Parkman & Co., an energy industry investment bank in Denver, told the WSJ.

By the middle of this past week, Chow said, Gulf Coast refiners were earning an operating margin of 63 cents, or 22%, for every gallon of gas sold at the average price of $2.91. That is down a bit from last Monday, but well up from the beginning of August, when refiners earned 20 cents, or just 9% of the total price of a gallon of gasoline, which averaged $2.22 then.

Put another way, refiners are capturing 43 cents more on every gallon of gas sold than they did at the beginning of August. The value of crude oil in that gallon of gas rose 2 cents in same period. "The domestic market has never experienced anything like the surge in refining margins over the past month," Chow told the WSJ.

Retailers are also making more on gasoline. "When wholesale gasoline prices move down quickly like they are [doing] now, retail prices don't fall as fast," Chow said. "But when wholesale prices move up quickly like last week, the opposite happens." Retailers are playing catch-up by lowering their sales price gently.

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This disconnect is adding to the already plump cash flows for the refiners. The benefit is smallest at the giant integrated oil companies with everything from exploration to retail operations. The gains are most obvious on performance at the nation's independent oil refiners.