Market Pricing
May
5
Written by:
5/5/2009 7:43 AM
It’s all about basic economics – supply and demand.
Given the economic realities, many analysts and industry observers predict the price of gasoline will reach upwards of $2.50 per gallon by Spring. It’s all so simple isn’t it?
Lower demand, decreased supply, upward pressure on prices.
At the same time, in response to the recessionary slowdown, refiners are now cutting production to avoid taking losses on gasoline no one will buy.
Historically, West Texas International crude has cost more than imported oil. So there are no pipelines to carry it beyond the nearby refineries in the Midwest, parts of Texas and a handful of other places. Refiners outside of west Texas simply can't get their hands on it.
West Texas crude is currently selling for less than inferior grades of crude from other places around the world. But—and here’s the twist—overseas crude goes into most of the gas made in the United States. 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 West Texas crude.
Demand down, supply up, prices down.
The benchmark for crude oil prices is West Texas Intermediate. That's the price that is quoted on business channels and in the morning paper. The recession and resulting slow down in driving, industrial production, and other uses of oil has left U.S. storage facilities full of West Texas crude, sending prices for the premium product to five-year lows.
Crude oil is now trading at about $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas has almost reached $2.00, its peak for the year. With raw material prices heading down and the price of finished goods heading up, it must mean that refiners are pocketing more? Not so fast.