Diesel and gasoline prices dip

Diesel and gasoline prices dip

Average retail pump prices for both diesel and gasoline in the U.S. declined across the board this week, according to data tracked by the Energy Information Administration (EIA).

The retail pump price for diesel across the country dropped 3 cents to $3.919 per gallon, which is 16 cents lower than diesel prices recorded during the same week in 2012, the agency said. Diesel prices fell in every region of the country and only remain above the $4 per gallon mark in two areas – New England ($4.046 per gallon) and California ($4.172). The Gulf Coast recorded the lowest average retail price for diesel in the U.S. at $3.831 per gallon.

Gasoline prices declined over twice as much as diesel, with the average retail pump price dropping 7 cents to $3.425 per gallon, EIA noted – which is 37.9 cents per gallon lower than the same week in 2012.

Gasoline prices also declined in every region of the country, with the West Coast area, including California, home to the highest prices ($3.802 per gallon) and the Gulf Coast witnessing the lowest (an average of $3.176 per gallon).

EIA noted that one reason fuel prices are on the downswing relates to falling future contracts for oil. Crude oil futures contracts allow crude to be bought and sold for delivery at specific dates in the future, the agency explained, meaning market participants can lock in a price today for the future delivery of a barrel of oil.

Thus, over the past six months, the price of West Texas Intermediate (WTI) oil – a domestic-U.S. generated price index, as compared to the Brent price index, which reflects global oil prices – has increased, but the prices of futures contracts for WTI further into the future have remained fairly flat.

The futures market indicates expectations that U.S. oil production, particularly from low permeability or “tight” formations will increase in future years, contributing to downward pressure on the WTI price, the EIA noted – pointing out that its latest Short-Term Energy Outlook forecasts U.S. total crude oil production to average 8.4 million barrels per day in 2014, 1.9 million barrels per day higher than in 2012.

As a result, the oil market is experiencing a phenomenon the EIA calls “backwardation,” whereby higher prices for near-term contracts compared to prices for contracts with later delivery dates meaning prices are expected to fall in the future.

The fact that the market is experiencing “backwardation” reflects the market's anticipation that most of the recent international geopolitical factors will be temporary, the agency said, meaning oil markets expect the longer term fundamental production and transportation issues described above to remain, which contributes to lower WTI prices.

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