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Crude Oil Jumps, Downstream Margins Don't

Pump price highest in nearly three years

CAMARILLO, Calif. -- The April 20 U.S. average retail price of regular-grade gasoline is 9.19 cents per gallon (CPG) more than it was two weeks ago, 23.83 CPG higher than two months ago and nearly 37 CPG above its year-ago point, according to the most recent Lundberg Survey of approximately 2,500 U.S. gas stations. It is the highest retail price since late June 2015.

Nearly all of the cause can be attributed to crude-oil price increases. As reported here, an end to the pump-price increases would depend on what oil prices did next—and they did rise further, this time about 16 CPG equivalent since April 6.

What this did to the U.S. downstream was shave more than 2 pennies per gallon off the average retail gasoline margin and remove double that amount from refiners' gasoline margin. But unlike refiner margin, which, despite its recent erosion, remains aglow in historical terms, retail margin is at the moment painfully crimped.

Most of the latest oil price boost was passed through by refiners into wholesale gasoline, and most of the wholesale gasoline price increase was passed through by marketers into the retail price.

Another gasoline price rise contributor, much smaller than oil, is the higher-cost, lower Reid vapor pressure (RVP) summer blend, the shift to which is now nearly complete.

Underappreciated by casual observers, industry margins are living, breathing components and drivers of retail prices, and they are plenty volatile. Significant pressure is on retailers to recover loss, but less so in the case of refiners at this time. The former situation could result in a further retail-price rise but the latter situation may mute it.

Near-Term Prospect

With currently zealous gasoline production, refining capacity use above that of a year ago, both oil price and RVP cost increases mostly already absorbed into retail price, and lackluster year-over-year gasoline demand growth, the spring 2018 retail gasoline price spike seems more or less spent.

Peering down the pipeline, assuming no detrimental world oil-supply event, oil prices do not seem poised to rocket skyward. The new higher prices are already beckoning stronger oil production, an element of oil price peaking or falling. Meanwhile, the newly higher pump prices are a deflater for gasoline demand growth.

Even if oil prices strengthen somewhat from here, and even if there is a bit more price rise at the pump, scary talk of a $3-per-gallon national retail average is unrealistic unless oil prices leap approximately $7 per barrel higher. The oil futures market one year ahead does not "believe" that the current price will hold. Instead, it sees an oil price decline coming. The credibility gap is about $6 per barrel, likely in part because high oil prices can bring on lower oil prices—when they inspire more oil production.

Camarillo, Calif.-based Lundberg Survey Inc. is an independent market research company specializing in the U.S. petroleum marketing and related industries. Click here for previous Lundberg Survey reports in CSP Daily News.

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