A perfect storm is about to hit the gasoline market, making it possible that gas prices will jump by up to 20 cents per gallon over the next few days. With oil prices spiking and the onset of the peak driving season, drivers need to be prepared for some pain at the pump. Gasoline prices could be up to a nationwide average price of more than $3.70 per gallon, with some suggesting prices could reach an average of over $4 by the end of the summer.
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Oil prices, which typically make up about two-thirds of the price of gas, have been on the rise since the unrest in Egypt started heating up. In addition, output in neighboring Libya has been reduced, putting further pressure on world oil prices. Meanwhile, here in the U.S. our benchmark crude oil, West Texas intermediate, has risen to the point where it's within a few dollars of the global benchmark.
For the past few years, oil produced in the U.S. traded at a discount to world oil prices because of the lack of pipeline infrastructure. With new pipelines coming online and the boom in the transporting of crude oil by rail, that discount has narrowed from about $20 per barrel all the way down to nearly $2 per barrel. That is the lowest the spread has been in more than 31 months.
That tightening spread means pain not just for consumers, but also for refiners. Because refiners profit on the spread -- known as the "crack spread" -- between crude oil and gasoline, as that spread tightens, it also squeezes margins. That's exactly what's happening right now as oil prices are spiking but gas prices haven't quite caught up.
Because refiners must deal with the volatile pricing of both oil and refined products such as gasoline, investors could be in for a rough ride. Most will be at the ready when refiners such as Phillips 66 and Valero (VLO 2.29%) report second-quarter earnings later this month. Those earnings probably won't be as robust as investors have come to enjoy. Valero, in fact, has already warned its investors to expect lower earnings this quarter as higher costs are eating into its profits. Further, given the current rise in oil prices, the outlooks given by both companies are likely to be pretty muted. Investors seem to be anticipating as much, as both stocks are down more than 12% over the past month.
On the other hand, Continental Resources (CLR +0.00%) and EOG Resources (EOG +0.42%) are two U.S.-focused oil producers that have been enjoying oil's price ride higher. Both companies are up by more than 10% over the past month, as these two are getting higher prices for the oil that's produced. Investors here have been well rewarded as both are trading around all-time highs.
The bottom line here is that it will be a rough summer for both drivers and refiners. Investors in oil producers, however, will probably continue to enjoy the ride as oil prices stay over $100 per barrel. The good news, though, is that it's not too late to invest in an oil stock to help offset your pain at the pump.
