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If price of crude oil is dropping, why is cost of gas rising?

By CHRIS KAHN and JOHN PORRETTO Associated Press

Feb. 15, 2009, 12:25PM

NEW YORK — Crude oil prices have fallen to new lows for this year. So you'd think gas prices would sink right along with them.

Not so.

On Thursday, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. On Friday gas went a penny higher.

To drivers once again grimacing as they tank up, it sounds like a conspiracy. But it has more to do with an energy market turned upside-down that has left gas cut off from its usual economic moorings.

The price of gas is indeed tied to oil. It's just a matter of which oil.

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil.

"We're going definitely over $2, and I bet we'll hit $2.50 before spring," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. "This is going to be an unusual year."

On the last day of 2008, gas went for $1.62 on average, according to the auto club AAA, the Oil Price Information Service and Wright Express, a company that tracks transportation data.

The recession in America has dramatically cut demand for crude oil, and inventories are piling up. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America.

That foreign oil sells in some cases for $10 more per barrel — and that doesn't even include shipping.

Brent North Sea crude, which feeds some East Coast refineries — and therefore winds up at many gas pumps around America — now costs about $7 more per barrel than the West Texas crude. Deutsche Bank analysts say the trend should continue.

Historically, West Texas International crude has cost more. So nobody bothered building the necessary pipelines to carry it beyond the nearby refineries in the Midwest, parts of Texas and a handful of other places.

Now that the premium oil is suddenly very inexpensive, refiners elsewhere can't get their hands on it.

"It's so cheap," said Lynn Westphall, the senior VP of external affairs at San Antonio-based Tesoro, which owns a half dozen refineries on the West Coast and Hawaii. "But you can't just build a pipeline to everywhere. We know we can't get it."

Tesoro's refineries in North Dakota and Utah use locally drilled oil and Canadian oil, which also has been running about $10 more per barrel than West Texas crude.

So why not build more pipelines? Because investing billions of dollars over several years makes no sense when the prices could just flip a year from now to where they were before.

"How long is WTI going to be cheaper than Venezuelan oil? Than Canadian?" asked Charles T. Drevna, president of the National Petrochemical and Refiners Association. "You just don't build a pipeline like that."

At the same time, refiners have seen the same headlines as everyone else about job losses and consumer spending. They've slashed production just to avoid taking losses on gasoline no one will buy. Result: Higher gas prices.

"Why should a refiner produce more gasoline when the stuff we produce is not being used?" Drevna said.

Of course, complex explanations of the diverging price paths of West Texas crude and gas are unlikely to placate frustrated drivers. Memories of last summer's $4-plus gas have not receded.

"Drivers are being ripped off even more now than before," said Stuart Pollok, who was filling up recently at a Chevron station in downtown Los Angeles. He pointed out Exxon Mobil Corp. reeled in billions in profits last year when oil prices neared $150.

Others see the conspiracy reaching higher.

"It got really low during the elections and now it's going back up," said Christel Sayegh, a 23-year-old graphic designer in Los Angeles. "They do that every election, though, right?"

http://www.chron.com/disp/story.mpl/front/6264629.html

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If price of crude oil is dropping, why is cost of gas rising?

By CHRIS KAHN and JOHN PORRETTO Associated Press

Feb. 15, 2009, 12:25PM

NEW YORK — Crude oil prices have fallen to new lows for this year. So you'd think gas prices would sink right along with them.

Not so.

On Thursday, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. On Friday gas went a penny higher.

To drivers once again grimacing as they tank up, it sounds like a conspiracy. But it has more to do with an energy market turned upside-down that has left gas cut off from its usual economic moorings.

The price of gas is indeed tied to oil. It's just a matter of which oil.

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil.

"We're going definitely over $2, and I bet we'll hit $2.50 before spring," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. "This is going to be an unusual year."

On the last day of 2008, gas went for $1.62 on average, according to the auto club AAA, the Oil Price Information Service and Wright Express, a company that tracks transportation data.

The recession in America has dramatically cut demand for crude oil, and inventories are piling up. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America.

That foreign oil sells in some cases for $10 more per barrel — and that doesn't even include shipping.

Brent North Sea crude, which feeds some East Coast refineries — and therefore winds up at many gas pumps around America — now costs about $7 more per barrel than the West Texas crude. Deutsche Bank analysts say the trend should continue.

Historically, West Texas International crude has cost more. So nobody bothered building the necessary pipelines to carry it beyond the nearby refineries in the Midwest, parts of Texas and a handful of other places.

Now that the premium oil is suddenly very inexpensive, refiners elsewhere can't get their hands on it.

"It's so cheap," said Lynn Westphall, the senior VP of external affairs at San Antonio-based Tesoro, which owns a half dozen refineries on the West Coast and Hawaii. "But you can't just build a pipeline to everywhere. We know we can't get it."

Tesoro's refineries in North Dakota and Utah use locally drilled oil and Canadian oil, which also has been running about $10 more per barrel than West Texas crude.

So why not build more pipelines? Because investing billions of dollars over several years makes no sense when the prices could just flip a year from now to where they were before.

"How long is WTI going to be cheaper than Venezuelan oil? Than Canadian?" asked Charles T. Drevna, president of the National Petrochemical and Refiners Association. "You just don't build a pipeline like that."

At the same time, refiners have seen the same headlines as everyone else about job losses and consumer spending. They've slashed production just to avoid taking losses on gasoline no one will buy. Result: Higher gas prices.

"Why should a refiner produce more gasoline when the stuff we produce is not being used?" Drevna said.

Of course, complex explanations of the diverging price paths of West Texas crude and gas are unlikely to placate frustrated drivers. Memories of last summer's $4-plus gas have not receded.

"Drivers are being ripped off even more now than before," said Stuart Pollok, who was filling up recently at a Chevron station in downtown Los Angeles. He pointed out Exxon Mobil Corp. reeled in billions in profits last year when oil prices neared $150.

Others see the conspiracy reaching higher.

"It got really low during the elections and now it's going back up," said Christel Sayegh, a 23-year-old graphic designer in Los Angeles. "They do that every election, though, right?"

http://www.chron.com/disp/story.mpl/front/6264629.html

Supply and demand, pure and simple.

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Because OUR oil comapanies are tucking it to us. Exxon will have record profits again, even though they sold less product. Plus the same douche bag speculators that drove oil to $150 are doing the same with gasoline. The supply and demand is bs, IMHO. There is a glut of crude now. There is no place to store it. Refineries have cut back on production as there is plenty of inventory and demand is down. It is a good old fashioned screwing as usual. We use oil, we pay. We don't use oil, we pay. And this time it has nothing to do with the OPEC production cuts.

R.I.P Spooky 2004-2015

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That damn Obama.

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I thought about this while filling up today. Oil is down considerably yet fuel prices are up. #######..

According to the Internal Revenue Service, the 400 richest American households earned a total of $US138 billion, up from $US105 billion a year earlier. That's an average of $US345 million each, on which they paid a tax rate of just 16.6 per cent.

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If price of crude oil is dropping, why is cost of gas rising?

I have no idea....R&D :blink:

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United States & Republic of the Philippines

"Life is hard; it's harder if you're stupid." John Wayne

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The oil boys, George's buddies, need their windfall profits :devil:

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United States & Republic of the Philippines

"Life is hard; it's harder if you're stupid." John Wayne

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I have a show to watch but I will be back in about an hour to answer this question. :whistle:

:lol: we'll be waiting.

LOL....Ok...This is going to be much harder than I thought because it is more complicated than I thought. But here goes:

Reason 1: When the papers say oil is XX.XX per barrel, they are going off of West Texas Intermediate prices. However, a lot of the oil we use comes from other priced oil (Brent North Sea crude, Canadian crude oil, Saudi Arabian, South American, etc.) which goes for up to $10 higher than the benchmark price (West Texas Intermediate crude).

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper. Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America. That foreign oil sells in some cases for $10 more per barrel -- and that doesn't even include shipping. Brent North Sea crude, which feeds some East Coast refineries -- and therefore winds up at many gas pumps around America -- now costs about $7 more per barrel than the West Texas crude. Deutsche Bank analysts say the trend should continue.

Reason 2: There are gasoline futures contracts and oil futures contracts, and so far gasoline and oil futures have diverged (they have branched off and are going in different directions). While oil futures are way down, gasoline futures are way up.

Even as oil prices have continued to fall in recent weeks, gasoline has diverged and gone higher. The second chart looks at the year to date change of the two commodity ETFs. As shown, USO (follows the price of oil) is down 23% year to date, while UGA (follows the price of gasoline) is up nearly 23%. This divergence is not what the consumer needs right now!

oilgasdiverge.png

Reason 3: Contango--Although prices are cheap now, long-term oil contracts are getting more expensive by the month.

Not a dance from Buenos Aires, the word describes a futures market where near-term contracts are cheaper than contracts farther out. That's our situation right now. The opposite of contango is called backwardation. That's when near-term contracts are more expensive than contracts farther out. According to the Fed, backwardation has been the condition of the oil market for 2/3 of the time since 1999. So, contango is less common, but not unheard of. Here are this year's remaining contracts for NYMEX Crude Oil (Light):

$37.45 Mar

$42.17 Apr

$45.92 May

$46.95 Jun

$49.34 Jul

$50.53 Aug

$51.45 Sep

$52.26 Oct

$52.91 Nov

$53.87 Dec

Reason 4: Oil refineries have scaled back on gasoline production

Beset by weak consumer demand and losses on gasoline sales, oil refiners have scaled back production since late December. The average utilization rate at U.S. refineries was 81.5% as of Feb. 6, the lowest in 17 years, not including hurricane-related slowdowns, according to the Energy Information Administration. As recently as early December, refineries were running at 87.4% of capacity. "If you're losing money on something and you're producing at 90%, you're going to cut back," says OPIS chief oil analyst Tom Kloza. "If there's no demand, … there's really not a whole lot of point to making extra gasoline," says Bill Day, spokesman for Valero, the largest independent U.S. refiner.
Edited by Confucian

India, gun buyback and steamroll.

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Setting aside other theories, the gas pump price fluctuates at will, because retailers chose to do so....Simple as that.

There is no real reason, other than the inability of our Government to control it.

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I have a show to watch but I will be back in about an hour to answer this question. :whistle:

:lol: we'll be waiting.

LOL....Ok...This is going to be much harder than I thought because it is more complicated than I thought. But here goes:

Reason 1: When the papers say oil is XX.XX per barrel, they are going off of West Texas Intermediate prices. However, a lot of the oil we use comes from other priced oil (Brent North Sea crude, Canadian crude oil, Saudi Arabian, South American, etc.) which goes for up to $10 higher than the benchmark price (West Texas Intermediate crude).

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper. Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America. That foreign oil sells in some cases for $10 more per barrel -- and that doesn't even include shipping. Brent North Sea crude, which feeds some East Coast refineries -- and therefore winds up at many gas pumps around America -- now costs about $7 more per barrel than the West Texas crude. Deutsche Bank analysts say the trend should continue.

Reason 2: There are gasoline futures contracts and oil futures contracts, and so far gasoline and oil futures have diverged (they have branched off and are going in different directions). While oil futures are way down, gasoline futures are way up.

Even as oil prices have continued to fall in recent weeks, gasoline has diverged and gone higher. The second chart looks at the year to date change of the two commodity ETFs. As shown, USO (follows the price of oil) is down 23% year to date, while UGA (follows the price of gasoline) is up nearly 23%. This divergence is not what the consumer needs right now!

oilgasdiverge.png

Reason 3: Contango--Although prices are cheap now, long-term oil contracts are getting more expensive by the month.

Not a dance from Buenos Aires, the word describes a futures market where near-term contracts are cheaper than contracts farther out. That's our situation right now. The opposite of contango is called backwardation. That's when near-term contracts are more expensive than contracts farther out. According to the Fed, backwardation has been the condition of the oil market for 2/3 of the time since 1999. So, contango is less common, but not unheard of. Here are this year's remaining contracts for NYMEX Crude Oil (Light):

$37.45 Mar

$42.17 Apr

$45.92 May

$46.95 Jun

$49.34 Jul

$50.53 Aug

$51.45 Sep

$52.26 Oct

$52.91 Nov

$53.87 Dec

Reason 4: Oil refineries have scaled back on gasoline production

Beset by weak consumer demand and losses on gasoline sales, oil refiners have scaled back production since late December. The average utilization rate at U.S. refineries was 81.5% as of Feb. 6, the lowest in 17 years, not including hurricane-related slowdowns, according to the Energy Information Administration. As recently as early December, refineries were running at 87.4% of capacity. "If you're losing money on something and you're producing at 90%, you're going to cut back," says OPIS chief oil analyst Tom Kloza. "If there's no demand, … there's really not a whole lot of point to making extra gasoline," says Bill Day, spokesman for Valero, the largest independent U.S. refiner.

Is this the long version of bend over, this won't hurt a bit? :lol:

R.I.P Spooky 2004-2015

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I have a show to watch but I will be back in about an hour to answer this question. :whistle:

:lol: we'll be waiting.

LOL....Ok...This is going to be much harder than I thought because it is more complicated than I thought. But here goes:

Reason 1: When the papers say oil is XX.XX per barrel, they are going off of West Texas Intermediate prices. However, a lot of the oil we use comes from other priced oil (Brent North Sea crude, Canadian crude oil, Saudi Arabian, South American, etc.) which goes for up to $10 higher than the benchmark price (West Texas Intermediate crude).

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper. Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America. That foreign oil sells in some cases for $10 more per barrel -- and that doesn't even include shipping. Brent North Sea crude, which feeds some East Coast refineries -- and therefore winds up at many gas pumps around America -- now costs about $7 more per barrel than the West Texas crude. Deutsche Bank analysts say the trend should continue.

Reason 2: There are gasoline futures contracts and oil futures contracts, and so far gasoline and oil futures have diverged (they have branched off and are going in different directions). While oil futures are way down, gasoline futures are way up.

Even as oil prices have continued to fall in recent weeks, gasoline has diverged and gone higher. The second chart looks at the year to date change of the two commodity ETFs. As shown, USO (follows the price of oil) is down 23% year to date, while UGA (follows the price of gasoline) is up nearly 23%. This divergence is not what the consumer needs right now!

oilgasdiverge.png

Reason 3: Contango--Although prices are cheap now, long-term oil contracts are getting more expensive by the month.

Not a dance from Buenos Aires, the word describes a futures market where near-term contracts are cheaper than contracts farther out. That's our situation right now. The opposite of contango is called backwardation. That's when near-term contracts are more expensive than contracts farther out. According to the Fed, backwardation has been the condition of the oil market for 2/3 of the time since 1999. So, contango is less common, but not unheard of. Here are this year's remaining contracts for NYMEX Crude Oil (Light):

$37.45 Mar

$42.17 Apr

$45.92 May

$46.95 Jun

$49.34 Jul

$50.53 Aug

$51.45 Sep

$52.26 Oct

$52.91 Nov

$53.87 Dec

Reason 4: Oil refineries have scaled back on gasoline production

Beset by weak consumer demand and losses on gasoline sales, oil refiners have scaled back production since late December. The average utilization rate at U.S. refineries was 81.5% as of Feb. 6, the lowest in 17 years, not including hurricane-related slowdowns, according to the Energy Information Administration. As recently as early December, refineries were running at 87.4% of capacity. "If you're losing money on something and you're producing at 90%, you're going to cut back," says OPIS chief oil analyst Tom Kloza. "If there's no demand, … there's really not a whole lot of point to making extra gasoline," says Bill Day, spokesman for Valero, the largest independent U.S. refiner.

Is this the long version of bend over, this won't hurt a bit? :lol:

Sure. People tend to search for an "in depth analysis" of why they are getting screwed at the pump. Simple answer, the oil companies can and will charge what they want... Analyze that...

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