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Oil prices are going up, but retail gas prices should drop slightly by Thursday.

Oil prices are climbing:  On Friday, West Texas Intermediary
(WTI) was selling on the NYMEX for $108 a barrel -- just pennies
away from the cost of Brent crude. This morning, both Brent and
WTI opened in the $107 a barrel range, with WTI costing just 44¢
less per bbl than Brent at 107.31 a barrel. This trend has had an
impact on California gasoline refining operations.  For the last two
and a half years, Brent has usually sold for ten to twenty dollars
a barrel more than WTI, which has been devalued on the global
market since the arrival of ICE, the Intercontinental Exchange for
oil and other commodities.

OPIS, the Oil Price Information Service, has noted that California
refiners are buying less crude from North Dakota's Bakken fields
because it is tied to WTI and is getting too expensive.

California is still the fourth largest oil producing state in
the U.S.A., so oil that's cheaper than Bakken oil is readily available.

Bakken crude is shipped in by rail car and sells at a discount to
WTI, or West Texas Intermediary of about $5 a barrel. Bakken Crude
is high quality and sweet, like WTI, which means it is easy to refine,
but the recent surge in sweet crude prices has sent local refiners
looking elsewhere for cheaper  oil. California refiners are mostly
geared to produce oil from locally produced crude and Alaskan North
Slope crude, both of which are lower quality and harder to refine.
However, because the refiners are set up to process oil that has
more sulphur (sour) they can still make sweet profits from the cheaper
oil that is available locally from California fields. This ability
to make sweet profits from sour crude was a technological breakthrough
that helped break the back of OPEC in the 1990s. It gives California
refiners an advantage. In fact, refineries that are geared to processing
sour crude, can only handle about 10% sweet crude without having to
reconfigure their operations.

LOCAL WHOLESALE PRICES ARE DROPPING.

In Southern California, the average wholesale price for gasoline has
actually decreased in the last week by a nickel on average. Since Friday,
brand-name stations have only seen discounts of about 2.7¢, but unbranded
independent dealers have seen price decreases of 7.6¢ since Thursday,
and 13.4¢ in the last week. These price cuts should make for healthy
margins and we can expect to see unbranded independent stations cutting
their retail prices. Meanwhile, major brand retailers can only cut costs
a penny or two.

We predict that as the Indies start stealing business from the majors
in the next few days that the major brands will start discounting their
gasoline and we should see prices continue to drop, but the first place
we will see them is at stations selling unbranded gasoline.

Posted by Charles Langley (858) 752-4600