Oil prices and gas prices are not always consistent. The rule that a $1 increase in barrel price will coincide with a 2.5 cent increase in a gallon of gas is not set in stone. Too many variables cause excess discrepancies in what should be a simple formula. What is going on when the price of oil and gas is offset, like it was in 2011 and seems to be doing now?
Some investors will argue for the Formulated Blendstock case. The argument is essentially distilled to the inclusion of Blendstock in the marketplace altering the price of oil. As investors use Formulated Blendstock as the golden standard for prices, they get a partly false idea of the valuation.
This is only part of the story, and not a large one at that. 2011 was a tricky period. The Middle East and North African tensions were at a staggering high, and oil prices were reflected from this tension. Furthermore, a massive disaster in Japan caused waves in oil and gas costs. These tragic scenarios help to diminish a nice balance between oil and gas.
Is there more? Of course there is, and it involves the New York trading compared to the London trading. This is a largely new phenomenon and one that is explored in much greater detail at my blog.
When Brent trades higher than New York, New York is pushed (or propels itself forward, however the argument can be made). What happens is a race, which seems to bloat prices out of the basic standard that should be sustained. It will level out eventually. Combine this trading exercise with the current political climate, the use of Reformulated Blendstock in trading, and other factors, and the cost discrepancy makes more sense.
The story is a lot thicker and juicier. Readers can go to my blog to explore more on the topic of oil and gas prices. Intrigued readers can look at it here. What creates the divide? Why is oil decreasing while gas increases, and vice versa? Perhaps the answers to all these questions will help service the bottom line. How can investors take this information and use it for their own portfolio?