Diesel and Gasoline Price Spreads Higher This Summer

Since January 2017, diesel prices have exceeded regular gasoline prices, but to varying degrees. Demand for gasoline tends to increase in the spring and summer while diesel demand (and the similar hydrocarbon product heating oil) is typically higher in the fall and winter.

However, there has been a significant increase in this spread from 15 cents per gallon in April and May of 2017 to approximately 35 cents today.1

 

As would be expected, supply and demand forces are the key drivers for this price spread.  Gasoline prices are driven mainly by the price-sensitive personal transportation market.  Also, gasoline demand is increasingly influenced by apps such as Gas Buddy, providing consumers with greater price transparency for retail gasoline prices.  For diesel demand, growth in shopping services such as Amazon may also be affecting the ability of logistic operations to optimize diesel mileage as was possible with large retail outlets.

Crude Oil Outlook

While futures markets aren’t a crystal ball, their price levels and related options are useful for estimating future ranges, or “confidence intervals,” for crude oil and natural gas prices.

The graphic below illustrates the crude oil pricing as of June 18, 2018 and predicted crude oil prices based on options on oil futures contracts (ticker /CL).  The blue lines are within one standard deviation (σ) of the settlement price (the middle, green line), and the outside, red lines are within two standard deviations for each month (for a refresher on standard deviations, see the January 2016 blog).

Based on June 18, 2018, pricing, the futures markets indicate that in mid-August 2018 the expected strip price is $64.62, with a 68% chance that oil prices will be between $58.00 and $71.50 per barrel.  Likewise, there is about a 95% chance that prices will be between $50.00 and $82.00.  For a longer-term view, by mid-December 2018 the approximate one standard deviation price range is between $52.50 to $76.50 per barrel with an expected value of $63.51.  As of last month, oil futures are still in “backwardation.”

Natural Gas Outlook

The natural gas futures contracts are currently trading at $2.99 per MMBtu for the Henry Hub (ticker /NG).  Although more affected by seasonal factors than crude oil, in August 2018, the expected price is $2.99 with a +/- 1σ price range of $2.70 to $3.25 per MMBtu, and the 2σ range (95%) of $2.40 to $3.65 per MMBtu.  For a longer-term view, by mid-December 2018 the expected price is $3.12 per MMBtu with a +/- 1σ price range of $2.60 to $4.00 per MMBtu.

  1. EIA Weekly Petroleum Status Report, June 8, 2018

Tags: Oil & Gas Price Outlook June 2018, Gas Price Outlook June 2018, Oil Price Outlook June 2018

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