Will Oil Break From Its Price Inertia?

Pump price slippage, but upward price pressure building
oil gas prices
Photograph: Shutterstock

In the past two weeks, the national average retail price of regular grade gasoline slipped a further 3.15 cents, to $3.1793, according to the most recent Lundberg Survey of U.S. fuel markets.

It has been a long 15 weeks of pump price cutting, totaling 80.73 cents.

Of that, the U.S. benchmark oil grade counts for all but about 3 cents of that price cut.

The rest comes from the gasoline market’s own sensitivities, including less severe anti-smog regs in winter months that give a small cost break. It is also coming from U.S. refiners, who have again upped their combined capacity utilization—another 1.1 percentage points to 93.5%, high for this time of year. Their margin on gasoline fell again in this period, and sooner or later, perhaps shortly after the “trough” month of January for gasoline demand, they will have to cry “uncle” and seek margin recovery.

Retail margin is faring fare. After forfeiting 16.92 cents in regular grade margin since Nov. 17, now it has regained 3.55 cents and averages 38.74 cents per gallon. on Jan. 5.

After basking in about $90 per barrel in late September, West Texas Intermediate (WTI) prices have been gyrating with a band of about $70 to $80 where they resided during most of last year. The near-month futures price was $73.56 on Dec. 22, slipping to $70.38 on Jan. 2, then crawled back up to $73.81 per barrel on Jan. 5.

In addition to the 2.2 million barrels per day output cut announced by OPEC for the New Year, announced at the end of November, now additional elements have come in to support oil prices. The standout oil price support is the huge cost hike for shipping as vessels self-impose a giant detour around Africa to avoid the Red Sea, where the Iran-backed Houthis have virtually shot down shipping. Another input to price support is Iran’s reported demand for higher oil prices from China and others who aren’t troubled by sanctions. In addition, Libya’s biggest oil field’s production was stopped by internal protests.

If oil prices do now rise by a lot and a hike is sustained, the pressure upon refiners to pass through their higher buying costs into wholesale gasoline will not be denied, and retail prices will respond with an end to the pump price slide, reversing to increases. Although gasoline margin pressure was even greater upon refiners of late than upon retailers, the long march higher of cost components within retail gasoline margin will probably continue as 2024 unfolds.

Whenever and to what degree oil prices climb, substantial gasoline margin recovery by U.S. refiners will put rack prices higher than they otherwise would be. That may turn out to be a lot. In the possible event of a combining of a big oil price surge and a decent refiner gasoline margin restoration, the resultant pump price level may deliver shock to consumers.

Within the national average retail margin, tremendous differences exist at all times. Right now, the extremes between Houston and Seattle are stark: Seattle, according to Lundberg data, has an average retail margin of 95.76 cents on regular. After its high point on Nov. 17 at $1.0781, retail price cuts exceeded those of wholesale for a month, then during the two weeks of Dec. 22-Jan. 5, retail price cuts trailed those at wholesale, allowing margin to expand by 1.81 cents.

It is a given that fixed and variable costs of doing retail gasoline business in that market are of the highest nationally and may well ratchet higher from here. In Houston, where several costs can appear minor compared to markets like Seattle, the current regular grade margin is nearly naked at 11.08 cents, having scratched back a few precious pennies since early December. The data simply that Houston retailers have so far not recovered by a big lag last month when retail price increases responded very slowly to wholesale price hikes.

Click here for previous Lundberg Survey reports in CSP Daily News.

Trilby Lundberg is publisher of the Lundberg Survey of U.S. fuel markets. Lundberg Survey Inc. is based in Camarillo, California.

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