yeah that’s what I meant. Clearly i’m not an Oil & Gas guy 
I’m not either – you may be right. I just have been talking to my oil & gas guy homies to get up to speed on this stuff and try to understand it. I’m still disagreeing with the people though on the outlook on oil, because I think there are some unique dynamics at play. Shale wells seem like they may be a market driven swing producer and OPEC doesn’t want to loose market share. People keep comparing oil prices to history, acting like it is a competitive market that isn’t highly manipulated in the past.
Glad I’m still holding my short crude oil ETF… It’s not completely off setting the declines in my long positions, but it helps.
Can any of the gas jockeys here shed some light on why gas prices (in Canada at least) are so high even though oil is still hovering around the January low? Gas is down a measly 21% while oil has dropped far more than that. A couple of possible reasons I’ve heard are the refinery strike and the lower CAD. The hikes of gas don’t seem to be corellated to the timing of the strike (and isn’t it over anyway?) and CAD has dropped 7% since gas was at 78 cents, which obviously isn’t enough to cancel out the gigantic loss in oil price.
Gas (in SK) in January was 78 cents at $47/barrel and CAD/USD at $0.85. Now it’s at $1.02 with oil at $46/barrel and CAD/USD at $0.79. Why the discrepancy?
Gas as in gasoline or natural gas?
^There is likely a more comprehensive answer to this b/c I don’t know about the dynamics of gasoline in Saskatchewan, but a primary reason is b/c (I think) you’re looking at WTI crude oil prices and Brent crude is what moves gasoline prices, at least in the US (I’m less experienced in the Canadian markets). In January, WTI and Brent both averaged ~$47/bbl for the month. Today, WTI is $46 and Brent is $55 (im using USD)
I’m sorry for my US-centric answer, but I’m pretty sure it impacts Canada, too…WTI is a landlocked crude in the US (US producers are not allowed to export it and a major supply glut has occurred) and Brent is an international crude (trades across the world)
US producers can’t export crude oil, so when there is a lot of supply it suppresses prices b/c it can’t hit int’l markets. US refiners can export refined petroleum products like gasoline, diesel fuel, etc, however.
When there is a large spread between WTI and Brent crude oil (it’s been $8 and $9/bbl recently), refineries with access to the cheap WTI crude will buy it (MAJOR input cost advantage), refine it into gasoline and can export it into international markets and get pricing on gasoline that is more reflective of Brent pricing. Refiners do very well in this situation and they are the one getting the economic benefit. Consumers benefit when Brent falls, not necessarily WTI.
If the US came out tomorrow and said they are lifting the export ban on crude oil, refinery equities will probably all drop 7% to 10% (rough estimate). They’ve been doing very well and haven’t been sharing the benefits with the consumer.
This is a well known economist that built a simple regression predicting gasoline prices (based on Brent) : http://econbrowser.com/archives/2014/06/gasoline-price-calculator
^ Gasoline isn’t my speciality by any measure, but I think Tommy is right based on my limited knowledge.
^ Tommy gave a pretty good explanation. I’d say recent dynamics are combo of strong USD VS CAD and Brent strength vs. WTI. I’d also add that Canadian governments (in general) tax the crap out of gasoline and usually on a per litre basis, not as a %. So as the price falls the tax represents a greater share of the pump price and mutes the decline.
Petro Canada has a good page detailing this: http://retail.petro-canada.ca/en/fuelsavings/2139.aspx
I imagine this has been good for Canadian refiners, at least the ones out west that use WCS (IMO, SU, RDS). Access to absurdly cheap WCS crude, declining labour and materials costs, while still relatively high pump prices. Refiners out east using imported Brent pricing are probably doing less well (you hear that Line 9 opponents!). Also good for Alberta petrochemical business I think. People often forget that Alberta isn’t all oil production, its also home to a lot of users of crude/natgas as well who benefit from these conditions!
Doesn’t the refinery strike also come into play?
^ That’s a piece of it. Hey rawraw, you can now lend to oil and gas drilling projects! Better than LendingClub? Energyfunders.com
Ha ha, there are a lot of these types companies man. A buddy in West Texas sent me this company a few months ago IIRC. I think most are train wrecks waiting to happen. I’ll stick with homogenous consumer credit. I’d maybe consider real estate. But beyond that, I’m uncertain if you can crowd fund ‘real’ loans that require a knowledge of the customer, industry, etc.
Thanks for the answer Tommy.
If I understand you correctly, Tommy, you’re saying a big reason gas prices haven’t fallen much is because American refiners are exporting their gasoline because of the relatively high Brent price, which then reduces supply in the American market? This makes sense…except isn’t there still a massive oversupply of gas in the states? I’ve read articles about storage tanks in Cushing being almost full.
This export ban also seems a bit odd to me. I hadn’t heard of it before now. My guess is that it was put in place to try and keep gas prices lower for Americans? But really, if what you’re saying is true, then it would actually just be transferring wealth from oil producers to refiners by taking away the oil producers ability to get their oil to the most profitable market. Refiners seem to be getting the best of both worlds here.
geo, with all this talk of Alberta’s issues getting their oil to better paying markets, shouldn’t Western Canada be flush with some of the cheapest gas? My understanding is that Alberta oil is less than $40 a barrel. Also, the USD/CAD dropping has been cited frequently as a reason for rising gas, but do Canadians really get that much of their oil from American refineries?
Thanks for enlightening me guys. As a commuter, gasoline and oil are the two commodities that I’ve actually followed for the last 10 years, so I’m always interested in learning more about how they interact with each other. Often times I’m left scratching my head when the price at the pump changes, so I’m always open to learning more.
Nor really. Storage in Cushing relates to unprocessed crude oil, not gasoline or other refined products.
The export ban was instituted back in the oil crisis of the 1970s. It was thought more to protect energy security than keep prices low. Gasoline and products trade off their global benchmarks, so the WTI-implied price of gasoline is pretty useless. The bolded statement is true though. Many US refiners are able to buy crude at depressed WTI or WCS prices and sell the refined products at Brent-based prices.
While I’m not geo, the point is that gasoline and other products (diesel, jet fuel, etc) are all priced off of a brent barrel. Regardless of the cost of the input barrel (whether it be priced at WCS, WTI, or brent) goes in, it comes out priced as a brent product. That’s where refiners are making their margin, and that discount doesn’t get passed on to consumers.
Alberta refineries can truck or pipe diesel or gasoline anywhere. Its fungible. So there is really one price, other than tax impacts and shipping costs. And tons of Canadian gasoline is refined from North Sea and Gulf States. Canadian oil is used in Alberta, BC and to some extent Ontario refineries but most is shipped south. Quebec and the Maritimes (remember the biggest refinery in Canada is the 300,000bbl/day Irving outfit in New Brunswick) are supplied with Brent priced crude from overseas. Hence the Line 9 reversal project getting so much support from folks on either end of the pipe (eastern refiners want cheaper feedstock and western producers want higher more Brent like prices). By the way, I’m paying US$2.53/gal in Calgary right now (obviously I’m actually paying C$0.85/L, but thats the conversion equivalent). I was paying US$3.50/gal in California last month. So yes, I’d say Alberta gasoline is fair right now. And I think our taxes are higher here (though maybe similar to California). Western Canadian Select (WCS) is C$42 today, while synth crude is C$61. These are feedstocks for lots of refining in both Canada and the US.
what if we run out of storage
It’s 2.15ish/gal here now. CA is extremely expensive IMO. The average is 2.419/gal today and this has increased from the lows a month or two ago.
^ So Alberta is on par more or less with the US average, despite having higher taxes. Seems like thats a fair price, considering the glut of cheap Alberta crude.
Geo, has there been much talk about building out refining capacity in Alberta? An argument can be made they need more of it. Rather than waiting for Keystone or Enbridge’s Gateway pipelines (who knows when or if they come), why not just build out some refining capacity rather than being subject to environmental challenges and the related politics associated with those projects?
I know the capex on a new refinery is huge (maybe a brownfield expansion of existing refinery is better?), but those refining margins are very wide in Alberta so the economics may work, even if the increased demand for WCS results in higher prices. Those higher WCS prices may even help development of oil sands in the province, though. I may be missing something, but it sounds like it could be a win-win for Alberta. I’m not sure how much heavy to synthetic light upgrading capacity exists, so that may change the equation. These wide crude differentials may not last forever, so thinking should be long-term but I’d have to think new refining capacity in Alberta may make sense. Just curious.
I guess if the economics worked someone would be doing it, so I’m probably missing something.
Its probably a marginal cost discussion around shipping refined gasoline versus shipping WCS or Synth. Remember Alberta has the highest wages in Canada and probably North America, and insanely high capital costs. Its certainly not the cheapest place to do anything… Things are done here only when they have to be (like extracting crude). Anything else can be more cheaply done elsewhere. At the end of the day you’re either shipping WCS or gasoline or whatever, so proximity to the resource isn’t necessarily a good argument. There are been political talk from the opposition here suggesting that we should either publically finance more refineries or require producers to refine x% of Alberta crude in house. This has obviously never panned out.