Prices at the Pump Are Rising: Is It Seasonal or Something Else?

Crudefunders |

It’s tax time again, and for those of us who had to pay more to the IRS, we’re irritated. Where are all my tax dollars going, and why is Congress working only 13 days this month? I’d like a job like that: full time pay for part time hours! I’m sure many of you understand how I’m feeling. UGH…Then I read an article online that projects a price of $70 per barrel for crude oil by year’s end, and I wonder when it will stop. I don’t see it... at least not now. Understanding that a rise in crude oil prices would bring with it an increase at the pump that would hit us all in the pocket book, I decided to address this issue head on.

Today, we’ll look at the price of gasoline and its underlying futures contract RBOB on the New York Mercantile Exchange (NYMEX), and we’ll drill down and look at our local basis, a term I’ll define below. We’ll also look at typical “adders” that make up the local basis and finally, we’ll look at trends over the last 15 years, to see if there is a way to anticipate price movement in gasoline.

Let’s start by defining the term basis. In commodity terms, basis is the difference between the NYMEX – RBOB futures price for the nearby contract (closest to expiration), and the retail price in a particular area. Since Dallas is right in the middle of the country and I’m in the Dallas area, we’ll use Dallas for our examples. In Dallas, Texas, the local basis between RBOB futures and local gasoline price is usually around $0.54 per gallon. With a futures price for RBOB (the futures product we use to price gasoline) of $1.6690 per gallon, the futures plus basis price should be around $2.209 per gallon. (See graph below)

Our local basis of $0.54 in Dallas is usually a stable value, while the futures price and retail prices fluctuate according to varying risk factors and economic conditions. Today, the lowest retail price I saw posted was $2.229 per gallon, so with a futures price of $1.6690 add the $0.54 Dallas basis and you see there is a gap of $0.02 left to cover profit and any local fees. With fees for local transportation and promotions of another $0.01 per gallon, that leaves only $0.01 per gallon for profit. Wow, that’s tight!

If you understand basis, you understanding the price of gasoline at the pump, and there are several items that contribute to basis value - these items are called “adders”. Quite simply, adders add to the price of a gallon of gasoline and influence the price of fuel at the pump.Adders include the cost of transportation (primarily pipeline), storage, handling, state and federal taxes, and risk. The biggest adders in the basis are federal and state excise taxes. According to the American Petroleum Institute, API, in the State of Texas, there is a state excise tax of $0.20 per gallon and a federal excise tax of $0.1840 per gallon leading to $0.3840 in total taxes per gallon of gasoline. So of the $0.54 basis in the Dallas area, 38.4 cents are taxes and 15.6 cents per gallon has to cover the rest of the basis adders including pipeline transportation, transportation from the terminal to the retail outlet, storage, handling and so on. While I won’t speak to any particular profit profile for any one company, suffice it to say, most retailers are lucky to take a one to two cent profit from a gallon of gasoline as illustrated above.

Here’s another way to look at it: Let’s assume the retailer will make a penny-and-a-half profit for every gallon of gasoline they sell. I go in to fill up my F-150 with 25 gallons of gasoline. On this transaction, the retailer will make a $0.30 profit on my $55.73 purchase of gasoline. That’s not much to cover overhead, is it? This is why you see prices at the pump go up faster when prices rise on the futures than they do when prices fall. The terminal and retail outlet has to do all they can to preserve or protect their tiny little profit. Understanding this changes the picture, doesn’t it? This is why retail fuel outlets sell candy bars, soft drinks and chips; there’s more profit in them than a gallon of gasoline.

While several adders contribute to the value of a basis, “risk” is one that varies... sometimes wildly. There are several types of risk, including geopolitical, (we wrote on this last week) currency, liquidity, weather (hurricane) and more. The risk we’re seeing right now in the energy complex is coming from geopolitical issues. This geopolitical risk premium is expected to increase due to increasing tensions between the US, North Korea, Iran, the Russians and others.



Interestingly enough, as we get closer to the hurricane season, another risk adder jumps into the pricing metric, “hurricane risk”. This adder will be developing very soon, as it is seasonal and usually begins the first of June and lasts until the last day of November. If the Caribbean and the Gulf of Mexico heat-up early, we’ll see it spike earlier. Fortunately, hurricane risk spikes recover quickly, but they still sting!

Over the last 15 years, gasoline prices tend to rise as demand for gasoline increases in the early summer, but not as much as you might expect. Since the beginning of 2000, gasoline prices have risen for the three month period starting in March, nine out of the last 17 years. Additionally, since the beginning of 2016, the price of a gallon of gasoline has trended upward.

We’re frequently asked where the price of a gallon of gasoline is heading for the summer months, and we usually say gasoline is seasonal, but with the added risk values from geopolitical issues like North Korea, Iran, Russia and Syria, and the hurricane risk that is coming you would expect to see prices much higher. Conversely, US supplies and production are dampening the hopes of retailers looking for higher prices so far this year. Today, the US is producing 9.252 million barrels per day of WTI crude oil and we’re dangerously high in crude oil inventories. To that point, we even saw a build in gasoline inventories in this week’s Department of Energy report of 1.5 million barrels. These factors all work together to keep our retail prices in a tighter range than we’ve seen in awhile. Sigh… It doesn’t look like the price for a gallon of gasoline is going through the roof anytime soon, as that online article from a big bank analyst projected. Beware the “Wild Predictors,” they’re usually selling something or trying to talk the world out of their bad position.

By Tim Snyder

Read More from Crudefunders

If you want more information on the energy markets and what is making prices move every day, go to our website www.crudefunders.com and scroll down to where it says “Subscribe”. There you will find our link to the daily commentary “Energy Wise”, a comprehensive piece that includes both fundamental and technical analysis of the day’s energy markets and provides you with the detail that you need. For more on Energy Economist Tim Snyder and his company, go to www.matadoreconomics.com.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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