Gasoline: Why Are the West Coast’s Prices Higher?
Every Monday, the EIA (U.S. Energy Information Administration) releases weekly gasoline and diesel fuel price updates based on national averages. The EIA’s update released on November 3, 2015, showed that US regular gasoline prices averaged $2.224 per gallon on November 3. Prices fell by ~0.17% from the previous week’s price of $2.228 per gallon. Compared with a year ago, prices were down by ~34.5%.
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Retail gasoline prices by region
Gasoline prices were lowest in the Gulf Coast region, at $1.92 per gallon. The East Coast, Midwest, and Rocky Mountain regions’ average gasoline prices were $2.12 per gallon, $2.27 per gallon, and $2.24 per gallon, respectively. High prices were seen in the West Coast region due to decreased production levels after an explosion and unplanned refinery outage at an ExxonMobil (XOM) refinery.
Why are gasoline prices important for investors?
Refiners are benefitting due to a prolonged positive trend in the crack spread and low oil prices, which generate more revenue from crude oil by-products such as gasoline and distillate fuels. Some refiners that may benefit are Phillips 66 Company (PSX), Tesoro Corporation (TSO), Valero Energy Corporation (VLO), and Marathon Petroleum Corporation (MPC).
Tesoro (TSO) and Marathon Petroleum (MPC) combined make up 2.4% of the iShares Dow Jones US Energy Sector ETF (IYE). Phillips 66 (PSX) accounts for 3.2% of the Vanguard Energy ETF (VDE). Valero Energy accounts for 3.6% of the Energy Select Sector SPDR ETF (XLE).
When gasoline prices fall, refiners may choose to decrease production. Conversely, if gasoline prices rise, refiners may increase production. Higher production levels mean greater volumes to transport for MLPs (master limited partnerships) such as Phillips 66 Partners (PSXP) and MPLX (MPLX), increasing the revenues of transport operators as well as refiners.
Based on crude oil prices, refiners will adjust the operable capacity, as crude oil prices also depend on refiners’ demand. Therefore, gasoline prices are an important indicator for investments in the energy sector. We’ll look at diesel price updates in the next part of this series.