$100 A Barrel Oil is on the Way

[lawgator1]

Originally Posted by myrobbins7

Hey look guys, Oil inventories increased by 3 mill. barrels for the week. Gas increased by 2.4 mill. barrels. Nice...

Originally Posted by droski

now $5.50!

Guys, let me ask you a serious question. My perception has always been that when crude oil prices go up, then the price of gas usually goes up within days. This even though the oil that will literally turn into the gas we buy won't be at the pumps for months.

On the flip side, the price of gas will not drop nearly as quickly if oil prices go down. If this decline continues, we'll hear the gas companies and the retailers claiming they have to wait for the lower price in their wholesale product months from now before they can lower their prices.

What gives?

[droski]

Originally Posted by lawgator1

Guys, let me ask you a serious question. My perception has always been that when crude oil prices go up, then the price of gas usually goes up within days. This even though the oil that will literally turn into the gas we buy won't be at the pumps for months.

On the flip side, the price of gas will not drop nearly as quickly if oil prices go down. If this decline continues, we'll hear the gas companies and the retailers claiming they have to wait for the lower price in their wholesale product months from now before they can lower their prices.

What gives?

because the margins are so slim for the gas stations they get ansty when they think their imput prices might be going up. not so much when they are going down.

[lawgator1]

Originally Posted by droski

because the margins are so slim for the gas stations they get ansty when they think their imput prices might be going up. not so much when they are going down.

So they have been raising the price prematurely you would agree? That is, if on June 29 the price of oil went up by a few dollars a barrell, they are raising prices on a gallon of gas on, say, July 1 when they won't actually see a rise in their own wholesale price until, say, October 1 based on the June 29 increase in the price of oil?

The only way that could work, it seems to me, is if the other gas stations all agreed, implicitly or explicitly, to follow the same formula for the retail price of fuel. Otherwise, if one of them honestly changed prices only to reflect the change in wholesale price they paid at the time, then the price of gas would ebb and flow with a few months' difference in the price of oil.

That is, if the gas station owner truly changed retail prices based on the change in the price of his product given what happened on June 29, then the price of gas would go up, not on July 1, but on October 1.

This might not be so bad if, when the price of oil goes down $5 a barrell on July 15, we see a decrease in the price of gas on July 17. But, I don't think we will. Now they will point to the delay factor.

And that pricing strategy works only if there is a herd mentality to the gas retailers. Do you think there is? And if so do you think there is a real anti-trust issue here?

[droski]

honestly i'm not sure. the refiners could easily be the ones raising prices on them (and therefore the stations pass it thru) because they know their imput prices are going to go up immediately and they are losing money. hard to make an anti-trust argument when the refiners are losing millions a quarter. my guess is that the gas station owners take any chance to get some extra margin and since we regurally see two gas stations across the street with the same price it's obviously there is some collusion going on.

[utvolpj]

In our business it's due to using the replacement cost to hedge against increases. Costs are going up and there is no reason for me to get rid of current inventory at the lower price then show a huge spike.

As for when oil goes down, why would I ever sell my current inventory at a loss just because it's going down in the future? I've already paid for it and I'm supposed to lose money because of it? Not very good business

[lawgator1]

Originally Posted by utvolpj

In our business it's due to using the replacement cost to hedge against increases. Costs are going up and there is no reason for me to get rid of current inventory at the lower price then show a huge spike.

As for when oil goes down, why would I ever sell my current inventory at a loss just because it's going down in the future? I've already paid for it and I'm supposed to lose money because of it? Not very good business

#1, there is nothing to hedge against. If the per barrel price of oil goes up, then when the increase ripple reaches you through the production system, you increase your retail price. There is no competition problem with that because all of the other retailers are doing the same.

#2, you would not be selling at a "loss" if your margin was maintained throughout the process and the increase and decrease actually reflected your raw cost.

I'm still not getting an explanation as to why, if the reason retail gas prices will go down more slowly now on the claim by the retailers that they have to wait for the price reduction to make its way to them, they increased the retail price of gas well before the per barrel price increases reached them earlier.

It just makes no sense. Unless, as I say, the other stations with a wink and a nod agree to market that way.

[utvolpj]

Originally Posted by lawgator1

#1, there is nothing to hedge against. If the per barrel price of oil goes up, then when the increase ripple reaches you through the production system, you increase your retail price. There is no competition problem with that because all of the other retailers are doing the same.

It not the way I've ever seen it done with any commodity I've dealt with. It obviously not done that way with oil either.

Originally Posted by lawgator1

#2, you would not be selling at a "loss" if your margin was maintained throughout the process and the increase and decrease actually reflected your raw cost.

you are assuming the decrease in raw is in line with your margin. When the decrease is greater than the margin you sell current inventory at a loss. Everything I've seen shows margin are ridiculously tight in gas sales.

Originally Posted by lawgator1

I'm still not getting an explanation as to why, if the reason retail gas prices will go down more slowly now on the claim by the retailers that they have to wait for the price reduction to make its way to them, they increased the retail price of gas well before the per barrel price increases reached them earlier.

It just makes no sense. Unless, as I say, the other stations with a wink and a nod agree to market that way.

they post their prices on big signs for everyone to see. Competitors see it, are in the business to make money and follow. It requires no winks or nods. Tell me what my competition is selling for and my price will be changed by the time the sales call is over.

[lawgator1]

Originally Posted by utvolpj

It not the way I've ever seen it done with any commodity I've dealt with. It obviously not done that way with oil either.



you are assuming the decrease in raw is in line with your margin. When the decrease is greater than the margin you sell current inventory at a loss. Everything I've seen shows margin are ridiculously tight in gas sales.



they post their prices on big signs for everyone to see. Competitors see it, are in the business to make money and follow. It requires no winks or nods. Tell me what my competition is selling for and my price will be changed by the time the sales call is over.

You are more sophisticated than I on the first two points. But as to the third, if the market was working correctly, then the retail prices would not rise until the ripple of increased per barrel oil prices worked its way to that level. Similarly, the price would stay higher until any decrease in the per barrel price reached the retailer.

But when the per barrel price goes up and the retail price of gas goes up on that basis and does so in just a few days, whereas when the price of oil goes down but we are told that we have to wait for it to work its way through the system before gas prices will go down again, I'm calling shenannigans.

[Sjernigan88]

So will it ever go down again? Is this speculative? Where do you guys see it in a year? I am late into this conversation but just curious on what you guys think?

[lawgator1]

Originally Posted by Sjernigan88

So will it ever go down again? Is this speculative? Where do you guys see it in a year? I am late into this conversation but just curious on what you guys think?

Listen to the others before you listen to me when it comes to oil futures. Guys like droski are light-years ahead of me on the price of oil.

But on the price of a gallon of gas? I don't think it will come down for a bit.

[KB5252]

Originally Posted by lawgator1

Listen to the others before you listen to me when it comes to oil futures. Guys like droski are light-years ahead of me on the price of il.

But on the price of a gallon of gas? I don't think it will come down for a bit.

If I was a gator fan I would be ill too!

[BigPapaVol]

Originally Posted by lawgator1

But when the per barrel price goes up and the retail price of gas goes up on that basis and does so in just a few days, whereas when the price of oil goes down but we are told that we have to wait for it to work its way through the system before gas prices will go down again, I'm calling shenannigans.

Then you're making the absolutely ridiculous assumption that the retailers and distributors don't have to inventory fuel.

Are you assuming that they make it on site or get it for free somehow?

[oklavol]

Originally Posted by BigPapaVol

Then you're making the absolutely ridiculous assumption that the retailers and distributors don't have to inventory fuel.

Are you assuming that they make it on site or get it for free somehow?

I'm pretty sure gas stations refuel at least once a week (like we do). I don't think that price is set in stone weeks in advance. I think they pay at the pump just like we do.

[BigPapaVol]

Originally Posted by oklavol

I'm pretty sure gas stations refuel at least once a week (like we do). I don't think that price is set in stone weeks in advance. I think they pay at the pump just like we do.

and the distributor who delivers to them?

[lawgator1]

Originally Posted by BigPapaVol

Then you're making the absolutely ridiculous assumption that the retailers and distributors don't have to inventory fuel.

Are you assuming that they make it on site or get it for free somehow?

Originally Posted by oklavol

I'm pretty sure gas stations refuel at least once a week (like we do). I don't think that price is set in stone weeks in advance. I think they pay at the pump just like we do.

Originally Posted by BigPapaVol

and the distributor who delivers to them?

BPV, I'm not sure I understand your point.

My understanding is that the price of a barrel of oil is set by the traders before it ships to be refined. It gets shipped, then it gets refined, then the product is transported to the gas stations. I honestly do not know how long that typically takes, but since it is sent by ship to the U.S., its got to be quite awhile.

So, somewhere along the way (maybe the entire way along the way) someone is increasing their price on the product (be it the barrel of oil as it arrives to be refined, the refinery, the wholesaler, or the retailer of gas) well before their own pre-product price is increased because of the trading price of a barrel of oil.

The more I think about it, the more I suspect that in fact its everyone in the supply chain that does that. And so it makes even more sense to me that the price of a galon of gas would rise more quickly in response to an increase in the price of a barrel of oil than it would go down in response to a decrease.