Crude Oil Rises, But Prices At The Pump Lag

Includes: OIL, UGA, USO
by: Bespoke Investment Group

Crude oil prices in the U.S. have been on just as impressive of a run as equities in recent weeks, rallying by nearly 16% off of the lows from last fall. Thankfully for drivers, while crude oil prices have continued to rally, prices at the pump remain relatively in check. From the low in December, unleaded gasoline prices have only risen by 5%, which has really spared the wallets of American drivers.

As we pointed out two weeks ago, one big reason that gasoline prices have not risen by as much as WTI crude oil prices is due to the fact that Brent crude, the global benchmark for crude oil prices, has seen a much more subdued rally than WTI (the U.S. benchmark). As shown in the chart below, the rate of change off of the November lows for Brent crude (blue line) has been much slower than it has been for WTI (red line). While WTI has rallied by nearly 16%, Brent crude has only rallied by a little over 8%.

The fact that Brent crude oil prices have been rallying less than WTI crude oil is important due to the fact that gasoline prices are much more closely correlated to the price of Brent than they are to WTI crude oil. The chart below compares the prices of unleaded gasoline to Brent crude oil prices over the last six months. As shown, the relationship between gasoline and Brent crude is much stronger than the relationship between gasoline and WTI (shown in the top chart).

So for now, the fact that Brent crude oil has been rallying less than WTI is good for drivers. However, the relationship works both ways. Back in 2011, gasoline prices soared when Brent was rallying more than WTI. Then, in the late summer and fall of 2012, gasoline prices fell much more slowly due to the fact that Brent crude oil prices fell more slowly than WTI.

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