Crude Supply and Retail Price Not Related: AP

Under much discussion today—including a back-and-forth on CNBC—is an Associated Press (AP) story and its analysis into the price of crude and its relationship to the retail price of gasoline.

You can read the whole story. The heart of the research doesn't seem to be more extensive than doing a graph of two lines on a chart. One line is U.S. domestic crude production. The other is the retail price of gasoline. The two didn't go in the same direction.

The conclusion of the AP is very clear: U.S. production of oil has no impact on the price of retail gasoline in the U.S.

This study clearly has been kicked off by other events in the political season, like the claim by Newt Gingrich that as president he would incentivize so much output in the U.S. that retail gasoline prices would hit $2.50/gallon. Some backers of the Keystone XL pipeline have foolishly tried to make the line as a potential salve to the pain that high gasoline prices are causing, adding to the illogic.

The story says what we all know: that the price of oil is set by the world market. "(Oil) is a global commodity and U.S. production has only a tiny influence on supply. Factors far beyond the control of a nation or a president dictate the price of gasoline," the story says.

But the story would also need to say the following: that in the current market, with relatively minor players such as South Sudan, Syria and Yemen adding up to a not-insignificant hit on the supply side, and the Brent market in backwardation reflecting that tightness, the extra 600,000 (K) barrels per day (b/d) or so of U.S. output added since the beginning of 2009 could disappear right now, and there'd be no effect on the price that people are paying at the pump, because of this "tiny" influence of the world's third-largest producer.

Or that if a hurricane comes roaring through this summer and takes out 600 Kb/d of output, but doesn't affect refineries—Hurricane Ivan in 2004 was sort of like that—prices at the pump should hold steady.

There is little in the story that points to a look at world supply and demand during the 35 years they studied, didn't look at global spare capacity that could alleviate tight supplies, didn't look at estimates of global inventories, and failed to note that prices are set on the margin, where increases in production matter. It didn't really look at anything except those two lines, price and U.S. output.

The irony is that this story comes as the U.S. has had some significant divergence in retail price relationships, compared to the norm, as a result of the midcontinent glut of crude. It does seem as some U.S. drivers in the middle of the country have been getting occasional relief from world prices, though they may not think it.

At first, when midcontinent crude prices diverged from world benchmarks like Brent, or Gulf Coast benchmarks like light Louisiana sweet (LLS), it looked like it was going to be refiners who got all the benefit through fat crack spreads. But that doesn't seem assured anymore.

For example, let's start with Houston retail prices. Product in Houston can stay home, it can get sent into the midcontinent on pipelines such as Explorer, it can move up the Colonial Pipeline to the east, or it can be exported. So it's a good benchmark for comparing other retail markets.

For all of 2011, Chicago retail prices, according to the Energy Information Administration's weekly estimate, averaged about $0.37 more than Houston prices. But for a few weeks in late January, the midcontinent crude glut turned into the product glut in the midcontinent, and that spread fell as low as $0.018 before snapping back to more normal levels recently.

More pronounced has been the shift in the Denver market. Through 2011, Denver retail prices were usually within a range of $0.10 either side of Houston prices. But this year, the glut in the midcontinent has helped lead a significant change. Since early January, prices have been as much as $0.42–43 less than the Houston price. Even with a recent retreat, they're still about $0.20 less than Houston, a steep reversal from the past.

A radical concept: more oil leading to lower prices.

John Kingston, Platts