I agree! Changes in crude oil prices and the gasoline crack spread (difference between spot or wholesale gasoline price and crude oil price) account for most of the fluctuation in gasoline prices, indicating pressures on the upstream and downstream, respectively. Marketing, transportation, retail markups and taxes, the remaining components that make up the pump price, do not vary as much as either crude oil prices or the gasoline crack spread.
But increases in the gasoline crack are usually somewhat predictable, reflecting seasonal shifts in gasoline demand from January into the peak summer driving months. For example, over the 2000 to 2007 period, prior to the recession that affected gasoline markets in recent years, the Gulf Coast gasoline crack increased about $7.50 per barrel from January to April, or about 18 cents per gallon. Variations in the crack around national or regional norms often arise from local supply or demand variations.
In the last few weeks, however, the average Gulf Coast gasoline crack has increased steeply. Unusual inter-regional variations have also occurred. While gasoline cracks for much of 2011 to date were below average and even negative at times, they began climbing back and rose sharply towards the end of April. Volatility will remain high but oil appears to be in a choppy downtrend that targets near $85.00 a barrel basis the front month.
Oil, which has topped for the time being, will more than likely be in a sell the strong rally mode until the 4th of July barring war in the Middle East or a bad hurricane season or any other unforeseen event. Short term we should see wide swings so there will be opportunities for both the long and short side of the market, however we continue to stay bearish until mid summer. Perhaps after QE2 ends or if Europe raises rates in July we could then bottom, yet near term the fundamentals favor lower prices at this time.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.