Wednesday, January 16, 2008

Oil prices around $90 /bbl

After seeing prices rise on barrels of crude oil reach over $100, we see a slight alleviation in the past couple weeks. Prices dropped and then ended a little over $90 /bbl today, and analyst say that this is the lowest it should get and should expect barrel prices to increase. According to sources in the Associated Press article, there has been an increase in the demand for barrels in the past week, 4.3 million to be exact, which has been the first since Nov. 9, 2007.

This expected increase in the price per barrel, will most likely end up causing the gas prices to increase back to the $3 range and over per gallon. I could see the drop in price per oil barrels at the pumps when I just filled up two days ago at $2.89 /gallon, which makes a difference in the total when you fill up at $3.05 /gallon when the price per barrel was over $100.

According to the Energy Department, gasoline demand for the past week has fallen 188 thousand barrels, but last year's numbers shows that the demand should increase by about 1.2%.

1 comment:

bhansen said...

This post mentions the relationship between the price of oil and the price that we see at the gasoline pump (crack spread or crack ratio) when we fill up our cars. While it is true that gasoline prices are correlated with oil prices, there are several other important factors that affect the relationship.

Another major factor for gasoline prices is operations at refineries. As mentioned in class last week, we have not built a new refinery in the United States since 1976 (although several existing refineries have been expanded). As such, gasoline prices are affected by supply and demand with the refining capacity being a limiting supply factor. We all know what happened after hurricane Katrina when several refineries went offline –gasoline prices increased (much higher than any associated increase in oil prices) as there were fewer refineries available and thus less gasoline available. There is also a seasonality factor to gasoline prices as gas is in much higher demand during the summer and specifically during high travel holidays (Memorial day, labor day, etc).

Increases in the price of gasoline might also lag increases in the price of oil. Refiners must decide what margins they will make on their business when refining oil (at what prices they will sell their products vs. the market price of oil). There is some time lag between increases in oil prices and decisions refiners make to increase their product prices. Further, we could see gasoline prices lag or not follow increases in oil prices if refiners instead choose to not increase their prices (and instead take a hit on their business margins).

The following article provides good background information on the gas/oil price relationship: