Wednesday, January 09, 2008

Retail Fuel Margins Collapsing

The latest petroleum report from the EIA was a case of mixed news. On the one hand, inventories of crude oil fell 6.8 million barrels, while inventories of gasoline and distillates rose 5.3 million barrels and 1.5 million barrels respectively. The overall level of petroleum inventories were unchanged, in other words.

While the inventory news was a mixed news, the price story was unequivocal in that it painted a picture of soaring prices. What is interesting is that while retail prices of gasoline and diesel fuel is up 80 cents and 84 cents respectively, the spot market prices were up 100 cents and 104 cents respectively. This means that retail margins of gasoline and diesel is both down roughly 20 cents. This implies a 20-25% decline in the gross margins of gasoline stations. That in turn implies that retail prices of energy products -what's measured in official inflation indicies like the CPI and PCE deflator- will likely outperform market prices in the near future.


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