Commodities Corner

Why gasoline prices are set to fall even as oil marches toward $100 a barrel

‘Seasonality’ leads to lower gas prices for U.S. drivers

Oil prices may continue to rise, while gasoline prices extend their decline, analysts say.

Joe Raedle/Getty Images

Referenced Symbols

U.S. oil futures posted a climb of nearly 9% in September, but gasoline prices at the pump have declined — and are expected to fall further thanks in part to what some analysts refer to as “seasonality.”

“While oil has struggled, gasoline’s seasonality is kicking into high gear,” said Patrick De Haan, head of petroleum analysis at GasBuddy. Prices and demand for the fuel tend to change with the seasons, with prices and demand having a tendency to rise in the spring, reach a peak during the summer driving season, and fall back during the winter months.

The average U.S. price for a gallon of regular gasoline was at $3.793 on Friday afternoon, down 5.3 cents from a week ago, and about a penny less than a month ago, according to GasBuddy.

The fall in prices for the fuel comes even as oil prices have seen overall gains in recent weeks, with U.S. benchmark West Texas Intermediate crude settling Wednesday CL.1, -3.76% at $93.68 a barrel, the highest finish since Aug. 29, 2022. Prices for the front-month WTI contract gained 8.6% in September, according to Dow Jones Market Data.

“Weakening demand, the transition to cheaper winter gasoline and California’s waiver allowing the change to begin now all will put downward pressure on gasoline prices nearly nationwide starting in the next week or so, potentially going for several weeks or a month,” De Haan told MarketWatch.

The California Air Resources Board said it would allow gasoline sold or supplied for use in California that exceeds the RVP [Reid Vapor Pressure] limits through the end of Oct. 31. That would mark an early transition for the state from the lower RVP gas used in the summer to help reduce gasoline emissions to the higher RVP gas used in the winter.

California drivers often pay among the highest prices for in the country, with much of it attributed to state taxes on the fuel. On Friday afternoon, the average price in the state stood at $6.033 a gallon, up 26.8 cents from a week ago.

Oil prices, meanwhile, have “faded in front of $100 a barrel on profit-taking following the steep price runup in September,” but there’s more upside to oil and it’s “simply pausing the uptrend,” said Brian Milne, product manager, editor and analyst at DTN.

Crude costs will continue to underpin gasoline prices on a nationwide average, but prices for the fuel will remain well off the summer highs, he said.

Crack spreads

Crack spreads, which are defined as the price difference between crude oil and the petroleum products derived from it, have declined sharply, indicating the likelihood of lower retail gas prices ahead, analysts said.

Milne said the reason behind falloff in the crack spread is the rally in crude prices, “with more concern over crude availability than gasoline.”

Crude stocks at the Cushing, Okla., Nymex delivery hub, have dropped to their lowest since?July 2022, according to Energy Information Administration data, and are “moving closer to operationally low levels, said Matt Smith, lead oil analyst, Americas, at Kpler.

Read: 4 reasons oil prices are surging toward $100 a barrel

Crack spreads have also been under pressure due to seasonality, De Haan said.

On Aug. 31, based on data from the Oil Price Information Service (OPIS), WTI for October delivery settled at $83.63 a barrel on the New York Mercantile Exchange, while the September reformulated gasoline contract ended at $116.19 a barrel — for a price difference of $32.56 a barrel.

Friday’s settlement of $90.79 a barrel for front-month November WTI futures CLX23, +0.30% and $2.44 a gallon, or — given 42 gallons in a barrel — $102.48 a barrel, for the October reformulated gasoline contract RBV23 RB00, -3.81%, which expired at the end of the session, show the crack spread has fallen to about $11.69.

That may mark a new low for the year so far, said Tom Kloza, global head of energy analysis at OPIS, a Dow Jones company.

“Gasoline margins for refiners have plummeted, particularly in California,” he said. “October will bring falling leaves and falling gas prices.”

“ October will bring falling leaves and falling gas prices.”

— Tom Kloza, OPIS

The “gasoline rally is over,” but tune back in the first quarter of 2024 and it will be back, he said.

There are “lots” of $3-a-gallon retail gas price possibilities in the Great Lakes, Great Plains, and Gulf Coast states, said Kloza. The West remains higher than the rest of the country, but you will see some “glacial-rate drops” even in California, Nevada, and Arizona.

October could see U.S. national average gasoline prices fall at a rate of around a penny a gallon a day, he said.

DTN’s Milne also expects to see retail gas prices decline through year-end, assuming no major industrial accidents of “hurricane menacing Gulf Cost refineries.”

Even so, Milne said retail gas prices may not see a bottom until January.

Expect the national retail gasoline price to fall into a $3.20- to $3.40-a-gallon range late in the fourth quarter, he said.