Behind the Gasoline Price Spike

Behind the Gasoline Price Spike

Increased gasoline prices have caught the attention of the public. Prices have increased steadily over the last couple of years and the March price average so far sits at $2.69/gal, a whole $0.25/gal higher than this time last year (Fig. 1). As driving season begins, the $0.25/gal will begin to strain consumers’ budgets. What are the reasons behind the higher prices?

Figure 1 - US Retail Gasoline Prices (All Grades), Source: EIA

Figure 1 – US Retail Gasoline Prices (All Grades), Source: EIA

What is going on right now?
Gasoline prices have spiked this week, bewildering consumers. As big oil conspiracy theories continue to make their way around the grapevine, we explore the main drivers behind the rise in gasoline price.

Two main (and fairly simple) reasons underlie the rise in gasoline prices.

Changing Gasoline Specifications

Gasoline has two main performance specifications (among a host of others that are there for performance, safety, & environmental concerns): Octane & Reid Vapor Pressure (RVP). The octane content is the one everyone is used to seeing posted at the pump (premium 91, regular 87, etc.). The octane number captures the anti-knock properties of gasoline. The higher the octane number, the more valuable the gasoline. However, the RVP is not posted. The reason for this is the fact that the RVP specification changes every season with the weather. The RVP changes to regulate the volatility and the emissions from the combustion of the gasoline in the engine. In the summer months, the RVP specification is lower (harder to attain), meaning that the blend of intermediate refined products used in the mix are more restrictive and require higher value parts of the feedstock. Refineries have started to make the more expensive summer specification gasoline in preparation for driving season, meaning that the market for winter grade gasoline has become tighter. As weather has continued to warm up recently, demand has reached a March high according to the latest EIA Weekly Petroleum Status Report.

Rising Crude Oil Prices
The most marked reason behind the rise in gasoline prices is the price of the feedstock, crude oil. Crude oil prices have been trending higher on speculation that the oversupply that caused the price crash and led to an extended period of low prices has been reversed and inventories are being drawn down (Fig. 2). The $0.25/gal increase in gasoline prices since last year equates to an increase of 10%. That increase should come as no surprise, since the main feedstock for gasoline has actually increased 20% in the same time frame.

Figure 2 - WTI Spot Prices, Source: EIA

Figure 2 – WTI Spot Prices, Source: EIA

So What Next?
Gasoline prices are likely to climb higher in the coming months, due to the implications of the two factors highlighted above. Rising crude oil prices have already had an impact on the price of gasoline, but most refineries buy the crude oil they refine at least a month in advance, meaning that there is likely going to be higher feedstock prices for the incoming barrels that were bought more recently. The changing gasoline specification not only means that there is relative tightness in the short-term for winter specification gasoline available in storage, but that the higher priced summer specification gasoline will be hitting the market in June (also made from high cost feedstock). Driving season will also boost demand during this time frame as families hit the road for the summer. The combination of these factors means that gasoline prices will at least stay high, and likely go higher, barring another dip in crude oil prices. To track the progression of crude oil prices, follow our blog (https://info.drillinginfo.com/di-blog/) as we continue to track the speculatively induced crude oil price bubble and wait for fundamental realities to set in.

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