Investor

Impact of WTI on prices at the pump

Scott Bauer, for CME Group

IN ONE LOOK

  • Crude oil, the main component of gasoline, accounts for almost 60% of the pump price of regular gasoline
  • Shortages at Gulf Coast refineries, outages in Europe and sanctions on Russian oil have helped drive up the cost of crude

There are over 150 types of crude oil, each with its own consistency, chemical composition and potential for use. However, when we talk about oil, we are usually referring to the type found and used in the United States, called West Texas Intermediate (WTI) crude oil.

Because it is a light and sweet oil, WTI easily breaks down in the refining process to produce what is essentially unfinished gas; which is then blended with ethanol at gasoline distribution centers before being delivered to gas stations across the country. This refined but unfinished product is known as RBOB gasoline (Reformulated Blendstock for Oxygenate Blending). However, RBOB gasoline is not only used as an automotive fuel. It is also used in appliances, such as lawn mowers and generators, and in products like paint and pesticides.

But why do crude and gasoline futures prices behave differently when they are part of the same energy complex? And why does it always seem like the price of gas goes up like a rocket but goes down like a feather?

In order for crude oil to become gasoline, it must undergo a refining process. This involves shipping the crude oil from its destination port to a local refinery which in the United States is mostly located in the Gulf Coast region. Crude oil is boiled so much that it turns into vapor, which is then distilled and becomes liquid again.

In most cases, the difference in price behavior between crude and gasoline is due to what is known as a crack spread. A crack spread in futures contracts is nothing but the difference between a commodity and its by-product, or simply the difference in price between the wholesale oil product and crude oil. The crack spread offers a rough idea of ​​the costs of refining to convert crude oil into its by-product, which in this context is gasoline. The spread of crack is one of the reasons why you can expect to see a lag in the price of gasoline futures versus crude oil futures and may be an indication of widening refinery profit margins. This can be an important indicator to watch, as a drop in cracking spread below the refinery’s break-even point indicates that the refinery is making losses.

Crude oil, the main component of gasoline, accounts for almost 60% of the pump price of regular gasoline. The other approximately 40% of the gas price is based on refining and distribution costs, federal and state taxes, and corporate profits. A big contributor to soaring gas prices is that the cost of refining crude into gasoline has nearly doubled. Shortages at Gulf Coast refineries during the regular spring maintenance period, outages in Europe and Russian oil sanctions also helped push up the cost of crude.

In most cases, oil prices influence gasoline prices and not the other way around, which means that gasoline prices tend to be lower than crude oil prices. While supply and demand are two factors that roughly affect the price of crude oil and gasoline, oil prices are also directly influenced by the US dollar exchange rate and the production capacity of countries. of OPEC.

Each of these factors then flows, so to speak, from the oil well to the gas pump, impacting prices all the way.

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