There is normally a close correlation between crude oil prices and gasoline. However, over the last month and a half, oil prices, while volatile, have remained relatively flat while gasoline prices have fallen by about 6 cents per litre. It would require a change in the crude oil price of over $10 a barrel to cause a decline of this magnitude.
Other things being equal, gasoline prices tend to rise during the summer because demand is at its highest. Prices tend to decline in September after the summer holiday season is over. The effect has been stronger than usual for a number of reasons. At the wholesale level, Canadian gasoline prices closely follow those in the United States. The slowdown in the US economy has caused a significant drop in consumption of gasoline and other fuels and this has led to falling refinery utilization rates. Refineries have very high fixed costs, so they have an incentive to maintain production levels. One way to do this is to cut their margins in order to increase sales volumes. Another way is to build inventories. Refineries are doing both but this has not been enough to compensate for the fundamental lack of demand.
The following chart demonstrates how US refinery margins have declined since mid-August. The line shows the difference, converted to Canadian cents per litre, between the futures prices for crude oil and gasoline on the New York Mercantile Exchange (NYMEX). Throughout August, refinery margins averaged around 10 cents per litre but, by the end of September, they had fallen to around two cents.
Despite these efforts to boost volumes, sales have not kept pace with production. The US Energy Information Agency (EIA) tracks and publishes statistics on inventories of gasoline and other products and compares them to historical norms. Gasoline stocks, at 211 million barrels are at the very top of the historical average range. To make matters worse for the refiners, stocks of distillate (diesel and heating oils), at 171 million barrels, are about 25% higher than the historical range. The EIA does not expect much relief for refiners. They forecast that US demand will fall a further 13% by 2030.
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