When Gasoline Prices Sometimes Outrun Oil Prices

Back around the time of the recovery from the Global Financial Meltdown, consumers and investors witnessed an unusual phenomenon. During 2011, oil was trading at around $113 per barrel on world commodity markets. And yet, in some localities, gasoline was selling for $4 a gallon, the same level as when oil was at $140 per barrel.

What accounted for this unusual consumer price spike? Usually, for each $1 in the price per barrel of crude oil, the resulting Reformulated Blendstock for Oxygenate Blending (RBOB) trends at around $.02 to $.025 per gallon for the pump price of gasoline. RBOB is the futures standard for gasoline trading, just as the West Texas Intermediate (WTI) and Brent (London) Crude prices operate for oil futures. Under normal conditions, when oil was priced at a little under $93 per barrel, gasoline was around $2 per gallon. This translated into an RBOB average of $.023 over the WTI price for oil, which was within the historical range.

But in 2011, something strange occurred. RBOB/WTI price ratios soared to around $.09 per gallon for gasoline at the pump by the end of January. This ratio settled down until it leveled off at $.044, twice the historical ratio. Middle East tensions are often cited as the drivers for this kind of volatility, since war interferes with production, either physically or through uncertainties curbing incentive. This results in oil scarcity in a time of high demand, the logical mechanism for price spikes. Since 2011, however, higher RBOB averages have persisted despite depressed demand in a time of excess supply.

The current spikes are driven by a widening spread between the WTI and Brent futures pricing. This skews the resulting RBOB calculation as the spread between the two further diverges. This has detached the pricing mechanism from the standard supply/demand equation and the cost/profit margin equation. Specifically, the difference between costs and wholesale price levels are driving an upward profit margin for refinery usage.

As a result, RBOB ratios have become quite volatile, inducing a considerable degree of uncertainty over both short- and long-term futures calculation. If you go to my blog, the information found there can help investors identify these trends. Understanding how the pricing mechanisms work and the logic they are predicated upon can provide the best guide to aid investors in making their best bets on the commodities markets to receive the best return.