There are many questions the average investor may have concerning how gas prices are outpacing the price for light sweet crude oil. In the past, an increase in crude oil prices often indicated a rise in gas prices. However, recently, while oil prices remain fairly static, gas prices continue to rise. What this means is investors are beginning to see that oil prices and gas prices may not be as closely connected as people thought. This opens up a new avenue for investors, but it also means it’s one more thing investors have to navigate in a tricky energy market.
The real question, and one that can help investors to understand the market and act accordingly, is to figure out why this difference seems to be growing. While plenty of articles filled full of advice have tried to explain the issue, perhaps none explains it better than one written specifically on the causes for this price disconnect. While this article focuses a great deal on the changing of the spread between WTI and Brent crude as a reason for the difference in oil and gas prices, the bigger issue is a widening of refinery margins.
These margins are the price difference between the cost of crude oil to the refinery and the wholesale value of gasoline. However, thanks to an oil glut, allowing for massive surpluses and lower oil prices, refineries have lowered their cost of oil. As the number of refineries is dwindling to the point where the U.S. is importing gasoline from refineries abroad, the costs for delivery have gone up. In order to maintain current profit margins, refineries have had to extend their margins. This, in turn, has caused gas prices to outpace oil prices.
What this means for investors is not only are there significant profits to be made trading a commodity like crude oil, with more demand and less refinery capacity, gasoline has also become a viable investment. While gasoline may represent an investment that is open to speculation and turbulent shifts in value, it is this sort of scenario that creates the possibility of exponential returns on investment. It may not be the right market for everyone. However, for those willing to take the leap, there could be significant returns awaiting them.