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Wednesday
Jan162013

Crude Oil Rallies But Gasoline Prices Remain Level

Since December 10th, the price of WTI crude oil has seen a pretty substantial rally from $85.60 to $93.40 per barrel, or about 9.1%.  Normally when crude sees a rally like this, you would expect to see the price of gasoline follow suit.  In this instance, however, unleaded gasoline prices have been flat at $3.30 per gallon.  So what gives?

To help explain the apparent 'break' consumers are getting at the pump, one has to look outside of the United States to the global crude oil benchmark, and that is Brent Crude Oil.  The chart below shows the price of Brent and WTI crude oil over the last six months.  As shown, Brent crude oil prices have been considerably higher than WTI prices for the last six months.  However, in the five weeks that WTI has rallied 9%, Brent crude has only risen by 2.4%, causing the spread between the two crude oil benchmarks to narrow considerably.  At 17.2, the current spread (lower chart) is near its lowest levels in six months.

So why is this important?  Over the last several years, the price of gasoline has been more closely correlated to the price of Brent crude rather than WTI.  As shown in the chart below, when compared to the price of Brent crude, the lack of a meaningful uptick in gasoline prices looks a lot more logical.   Going forward, a continued narrowing of the spread between Brent and WTI crude oil prices is a relative positive for American consumers, as a smaller spread will help to put downward pressure on gasoline prices.