Tag: futures

Mr. Wholesaler, Tear Down Those High Prices!

Monday, September 15, 2008, 4:20PM:  I think we’ll look back on this weekend as the turning point for gas prices for quite a while.  On Friday and Saturday, there were price hikes to $4.09 and then $4.19, driven by fears of massive shortages due to Hurricane Ike striking Texas, and a sense that we were being deluged by our own hurricane.  In fact, a few Citgos in town went up to $4.29, and prices were temporarily above $5 in the central part of Michigan.  Whether we will be facing shortages and rationing remains unclear (and I suspect, unlikely).  What is clear is that as of Sunday night, Michigan and our friends Illinois and Indiana were stuck with the highest average prices in the country.  The gas price map on GasBuddy was glowing red in those states last night, and this afternoon, and the Governor and the Attorney General really need to investigate.

But, more volatility was in store.  NYMEX opened up over the weekend for a special session, and prices there plummeted.  It may be because the hurricane caused less damage to the energy infrastructure than feared, but it seems that the real reason is that some Wall Street financial firms are falling apart, and with it, the inflated prices at NYMEX and elsewhere.  Today, crude oil hit $96 a barrel, while NYMEX gasoline futures prices fell 20 cents since Friday and 43 cents since the beginning of September.

Patrick wonders if these price drops in New York will make their way to Ferrysburg, Michigan, which is where the rack rate is set for the Grand Rapids area.  It has to, and it will start very soon.  Expect lower prices starting tomorrow.

West Michigan’s higher prices justified, the pain will continue…

First off: Read this post thoroughly if you want to find out WHY prices are justified.

A brief thank you to Tom Kloza for taking the time out of his day (Publisher @ OPIS) to respond to a few questions I had.

I now understand and can say that I know why Grand Rapids (and all of Michigan) are suffering from higher gas prices than the national average (currently at $3.66/gal)

It all started back around August 11. Grand Rapids prices had been closer to the national average, and then suddenly on the 11th, the difference between NYMEX gasoline and our local rack prices started their disconnect.

Here’s an image (graph provided by GasBuddy, edited by me) to show you exactly what’s been going on:

If you notice, the disconnect is getting worse over time. On August 11, Grand Rapids was quite close to the national average. Around Aug. 15, we had a difference of about 15-cents. On Aug. 23, that shot to 19-cents. Then yesterday it jumped to 25-cents (more like 30-cents since all the stations reset at once here)

On the subject of this matter, people have been convinced we’re being gouged. At first it would appear so, and I was ready to believe it. In haste perhaps, some were even trying to tie the price of oil (same price months ago when gas was 60+ cents cheaper) to the price of gasoline. In my years of doing this, experience has taught me that oil and gasoline prices can never be tied together.

After receiving a response from Mr. Kloza telling me briefly about struggles with getting gasoline here, I went digging. The content below is what I found:

NEW YORK, Aug 11 Reuters – Gasoline differentials in the the Midwest and U.S. Gulf Coast were expected to continue climbing this week as refinery outages, tight inventories and low imports underpin values, dealers said. The latest in a slew of unplanned refinery upsets is a reduction of rates at Marathon’s 222,000 barrel per day Catlettsburg, Kentucky refinery after a crude oil pipeline rupture on Sunday, August 10.

Reduced rates at the refinery are expected to further boost already strong differentials for gasoline in the Midwest, adding to a decrease in gasoline supply in the region after last week’s an outage at Citgo Lemont’s FCC.

“The Magellan system inventories of gasoline have dropped 600,000 barrels since August 1st as new barrels were diverted the St. Louis and Chicago,” one Midwest broker said.

“At 18 days of supply coverage the system is not yet critically short gasoline… (Group Three) must compete for barrels against Chicago for these barrels, so more strength is likely.”

Gulf Coast gasoline differentials were also expected to be supported by a number of refinery upsets from last week.

Lyondell’s gasoline-making fluid catalytic cracking unit at it’s Houston, Texas refinery had an upset last week, and a company spokesman said the unit was still running, but did not specify if it is currently at full rates.

The restart of Citgo’s Corpus Christi, Texas refinery after a power outage last week is expected to last through Wednesday of this week, according to a filing with state regulators.

Gulf Coast gasoline differentials are expected to be further supported by sinking inventories of the motor fuel due to lower imports.

In the New York Harbor, values for conventional gasoline are generally seen tracking the Gulf. But the upside for reformulated gasoline may be capped due to higher inventories of the fuel due to weak blending economics.

After reading that, I found another news story dated more recently, September 5:

NEW YORK (Dow Jones)–U.S. refiners pushed gasoline output to record highs in the days before Hurricane Gustav shuttered operations along the key Gulf Coast.

Many plants are beginning to ramp up operations, but pre-storm oil
inventory data point to several areas of potential supply tightness far
from the Gulf region.

Late Friday, the federal Environmental Protection Agency issued waivers from clean fuel requirements for parts of Georgia, Alabama and North Carolina, and extended waivers in Louisiana until Sept. 15 to “allow for greater flexibility for the fuel distribution system to support an adequate supply of gasoline.” Lost refinery output last week alone could be on the order of 20 million barrels of gasoline and other products.

Power outages to plants and pipelines complicate the matter and spread the problem beyond the region. Midwest refiners – notwithstanding a surge to record-high gasoline output last week -face a supply shortfall as the Capline pipeline, the 1.2 million barrel-a-day main artery for crude supplies from the Gulf to the heartland, is only just resuming partial operations. The Colonial Pipeline from the Gulf to New Jersey, a crucial link for Northeast U.S. supplies, is running at reduced levels.

During September, shipments of gasoline on the vital carrier averaged 1.2 million barrels a day in the past five years, with distillate flows at around 625,000 barrels a day. At best,
refiners are likely to take at least a week to bring operations back, while offshore output will likely take twice as long to return to pre-storm levels, government officials estimate.

The big loss of refining capacity, relative to shut-in crude output, has helped sharp the steep falloff in prices begun when Hurricane Gustav was shown to be less destructive than Hurricane Katrina in August 2005.

Imports, especially of gasoline, are expected to flow heavily from Europe, where the fuel remains in surplus and the usual seasonal decline in demand may blunt the impact of supply losses. The end of August brings an end to the peak summer gasoline demand season, which was battered by high prices this year.

Michael McNamara, who compiles the SpendingPulse survey for MasterCard Advisors LLC, said U.S. gasoline sales between the end-May Memorial Day and Labor Day dropped 3.9% to around 9.4 million barrels a day, after a year-to-year rise in the peak period in
2007 of 2.4%.

Demand Down For 13th Month

EIA data for the four weeks to Aug. 29 show total U.S. oil demand down 733,000 barrels a day, or 3.5%, from a year ago, at 20.292 million barrels a day. That would be the lowest August demand since 2003 and mark the 13th straight year-to-year drop in monthly oil demand.

Preliminary data show January-August U.S. oil demand is down 847,000 barrels a day from a year ago, the biggest decline in the first eight months since 1981. At 19.9 million barrels a day, demand is the lowest in the period since 2001.

A pre-storm surge in gasoline output in the Midwest of 12.3% pushed regional output to a record 2.55 million barrels a day, and pushed nationwide output to a highest-ever weekly level of 9.422 million barrels a day. In an indicator that says more about sluggish demand than about refining capabilities, domestic output of gasoline
topped demand at the end of August for the first time on records dating back to 1991.

The last time domestic output topped demand in any week was in mid-January. Production exceeded demand by a slim 22,000 barrels a day in the latest week, while a year ago, demand outpaced production by 420,000 barrels a day in the last week in August.

Still, while margins favor a counter-season shift to gasoline output over distillate output, and refiners outside the Gulf Coast have some spare capacity, reliability of crude supplies from the region is vital.

Marathon wants to borrow crude oil from the Strategic Petroleum Reserve for running at two Midwest refineries, but the oil must be shipped through the still-limited Capline, which Shell said it hopes to have fully operational in the coming weekend. Valero said it cut runs at its Tennessee refinery.

Talks EIA warns that some local markets may face supply tightness and potential price jumps. But they won’t likely be enough to reverse the slide in prices in recent days, provided there isn’t any lasting damage to facilities.

Front-month crude has been the cheapest of all listed Nymex contracts in the past 10 days, a price curve that suggests weak near-term demand for crude and potential for a significant stock build, as refiners are rewarded for building inventories at relatively cheap prices now. But, at least in the U.S., Gustav is overriding, at least temporarily, those traditional moves.

So basically, on the 11th of August, a refinery went down due to a pipeline rupture. That pipeline may have well carried crude from the Gulf to the Midwest, so naturally when a pipeline goes out of service, oil delivery is effected. With less oil available to refine, supply takes over. Less supply means higher prices. Now we’re suffering from Gustav, which has also closed delivery of oil to some Midwest refiners. Can’t refine products means less supply, means higher prices. Since places outside the Midwest have alternative ways to get crude, their prices are lower because getting oil isn’t an issue like it is here.

A few words from Tom Kloza’s blog:

As I write this, the price of gasoline in the biggest global bulk market (the U.S. Gulf Coast) is trading for some 60cts gal or more above gasoline futures, or about $3.30 gal late Wednesday afternoon. It appears as though Ike has put some of the largest clusters of U.S. refining in jeopardy.

The last time we saw crude oil prices this cheap, the national average price for gasoline was about $3.25 gal. It’s about 40cts gal higher than that now, and I suspect we’ll see more increases in some markets by the weekend, even if Ike fizzles and cuts a path through rural less populated counties. Chicago is many states removed from Hurricane landfall, but even there, we’ve seen the impact of Gustav as well as the threat from Ike. Refiners have had less crude to run, and wholesale prices there have also moved into the $3.25 gal or higher neighborhood. This explains why some Midwestern towns saw some large retail increases even as network talking heads discussed plunging crude prices.

Most of the upwelling we’ve seen in fuel prices in September is related to Hurricane Gustav. It did not significantly damage refinery infrastructure but it did result in a drop in refinery output of nearly 2-million bbl per day last week (as measured by the Energy Information Administration or EIA today). Those kinks of lost daily output are now being felt in places like Kentucky, Tennessee, Illinois, and especially in states like Florida. Even California isn’t exempt — the state gets some of its very clean gasoline from refineries in the Canadian Maritimes and a key plant in the Virgin Islands. Fuel produced at those plants will probably be diverted to coastal states in the U.S. this month.

Even if Ike misses Texas refinery infrastructure, more kinks are coming, and Americans will inaccurately assume that they are being hosed. Capitalism is at work here – supply is threatened—and buyers outnumber sellers, for the moment.

Basically prices are higher because we’re battling other states to buy the same gasoline. The highest bidder wins because this is supply and demand!


Expected Price Calculation

The basic idea to make predictions is to develop an estimate for the retail price for which retailers are not making any profit.  In our postings, this is sometimes called the “0-cent margin price” or the “Spike Line price”.  As the retail price gets closer to this price, a reset of 15 cents or more becomes more likely.

To compute the price, we have to take into account an estimate for the wholesale price, a variety of taxes, and miscellaneous items (e.g., middlemen, freight, and storage fees).  Tax rates are set by the Federal government and state governments, and the miscellaneous items stay relatively stable.  So, the key number to focus on from day-to-day is the estimated wholesale price.

There are a number of ways to estimate the wholesale price.  One approach is to combine the RBOB quote with this RBOB/CBOB comparison quote.

The formulas for the current calculations can be found on our Spike Line page.

— Ed Aboufadel


This page is filled with great information on the math behind gasoline prices, the stats of hikes, days they are most likely to occur, and the data behind why prices rise and fall. This information is about as raw as it gets, meaning it is hard to understand for some who haven’t looked at it before. We’re posting it to show what we do to try and win “The Gas Game”.

First of all, see how Ed calculates the expected price. It is a formula that takes in many numbers from different sources.

Secondly, see what day a gas price hike is most likely. Ed’s data reflects over six years experience of monitoring gas prices.

Third, try and read the Weekly Petroleum Status Report from the Department of Energy. This report can greatly effect local prices and market prices. It is released typically on Wednesday mornings at 10:35am Eastern Time.

If you aren’t bored yet, another good summary of a week’s petroleum usage is the data report “This Week In Petroleum” (Gasoline Section). It is raw numbers, graphs, and data from the nation’s oil companies and refiners. It contains some of the same information found in the WPS report.

Some other good information and data about gas prices can be found on gasoline retailer’s own websites. Some retailers even list their current fuel prices at some of their stations. Some that do this are Speedway, Pilot, and Flying J. Definitely monitor many stations across the country for a large snapshot!

All of these pages that are listed are a GREAT source of information for why gasoline prices go up and down. The government reports especially play in to prices. After the reports are released, traders read them and see if there are any surprises. Before the reports are released, traders are typically polled to check their expectations of the governments report. If the report is worse than expected, traders buy oil and gasoline contracts, and wholesale prices rise. If the report is better than expected, traders sell oil and gasoline contracts, and wholesale prices fall. This is part of the reason why most gas price hikes are Thursday: the report is released Wednesday, traders react, and pump prices either rise the following day or they remain the same or fall if the report is good.

Today’s Grand Rapids Gas Price Trend:

Some more good resources to check out:

Oil and Gasoline News from MarketWatch | Speaking of Oil with Tom Kloza | Energy Information Administration | AXXIS Petroleum- Price Services | List of U.S. Oil Refineries, Capacity and Location | U.S. Refinery Expansion Plans/Updates | Michigan Gasoline/Product Pipeline

Helpful Images:

Areas where RFG (Reformulated Gasoline) are required by the EPA

Areas where RFG (Reformulated Gasoline) are required by the EPA

More information and links to data may be posted here at any time, so stay tuned! In addition, if you have any good information/stats/data that you think should be added here, e-mail Patrick. The address is on the left side of the main index page.

CFTC investigating Big Oil for false oil inventory reports

News this noon from WSJ that oil companies may have reported false oil inventory levels to benefit their positions:

The U.S. futures market regulator is investigating whether companies are reporting false oil inventory levels to benefit their trading positions, The Wall Street Journal reported on Thursday.

The paper, quoting people familiar with the probe, said the Commodity Futures Trading Commission is taking testimony on periods when there have been big moves on the oil futures market, including July 2007.

The commission is concerned that companies may have tried to manipulate short-term pricing on oil markets through physical oil sales and purchases, the Journal reported.

According to the report, companies could also theoretically push prices higher by under-reporting oil inventory and then sell their oil at a premium.

The commission is also seeking data about what companies report to the Energy Information Administration, which reports oil inventories each week, the Journal reported.

The paper said this CFTC probe is a part of the larger investigation the commission launched last December into possible manipulation of the market.

Wow, can’t say I’m surprised. I had a feeling this could have been happening for some time, yet no one can really know who is fixing the numbers submitted to the DOE.

Go get em. This could been have greatly effecting prices in a negative way.

Keep track of wholesale oil and gasoline prices at TheGasGame.com!

With one simple visit to TheGasGame.com, consumers can now see delayed trades of oil and gasoline futures!

TheGasGame.com is your complete source for beating high gas prices, and adding this information on the website will give consumers one less place to find the information. Wholesale oil and gasoline futures are traded on the NYMEX exchange and directly influence local prices.

The information can be found on the sidebar (the left of the screen) under the search area. Look for the “OIL/GASOLINE FUTURES” headline. Since futures are traded by month, you’ll see the soonest month’s contract. PRICES ARE IN U.S. Dollars (3.22= $3.22, etc)

We’ve also made some changes to our design for those running Internet Explorer. Hopefully you notice the changes.


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