Gasoline, the current champion

--On December 1, unleaded conventional gasoline on the Gulf Coast stood at the equivalent of approximately $44.15/b. WTI was at $49.26. When January WTI rolled off the front month on NYMEX Tuesday, Platts assessed WTI at roughly $38.65/b. Gasoline, meanwhile, was at $48.50/b, and it had been more than $1 higher than just a few days earlier. So that drop of almost $11 in crude prices over that time has been reported regularly on all sorts of media, but the fact that there actually was an increase in spot gasoline prices, the building block of retail gasoline prices, has not gone widely reported at the same time.

--Why is gasoline getting so tight? One of the key reasons is that horrendous gasoline margins meant that refiners don't want to make it. In the week ending January 9, US refiners produced approximately 8.81 million b/d of gasoline. That is lower than almost any figure you'll find in 2008, except for the sharp decline that occured during hurricane season.

--And why would they want to do that? Back to the earlier number. On December 1, just doing a simple percentage comparison of WTI to Gulf Coast gasoline, crude was about 111% of gasoline, meaning every barrel of gasoline produced was a loser for a refiner. Hence, the market experienced a slump in US gasoline production from almost 9.2 million b/d in the second week of December. That percentage spread between crude and gasoline has slipped to less than 80%, which means refiners should start to be incentivized to produce more gasoline, after cutting output by almost 400,000 b/d in just one month.

--What's even more striking is how much diesel prices in the Gulf Coast have fallen relative to gasoline. On December 5, Platts assessed Ultra Low Sulfur Diesel at more than 165% of the price of conventional gasoline. By January 20, that number had slipped to less than 114%.

--But diesel as a percentage of WTI has not weakened, and that fact helps show how much gasoline has strengthened compared to the rest of the market. On December 1, diesel to WTI stood at 133%; on January 20, it was more than 140%. So diesel strengthened relative to crude, gasoline strengthened relative to crude, and gasoline strengthened relative to diesel. No doubt about which product was king of the hilll during this time.

The bottom line is that crude has taken all the hit on the market weakness in recent weeks. As crude supplies continue to pour on to the market in excess of demand, the oil has gone into storage, not into refineries. Not surprisingly, US crude inputs into refineries dropped from almost 14.98 million b/d in the first week of December to 14.58 million b/d last week. So the supply of products has not risen as excess crude pummels the market lower. But with refining margins getting better, that is likely to end.

Yes, these numbers are somewhat skewed by the collapse in the front month of the WTI contract as expiration neared. By contrast, crude today on the NYMEX for March delivery settled at $43.55/b. But the trend of weakening crude and strengthening gasoline is not completely negated just by the late fall in crude prices; the strength of gasoline to diesel is proof of that.