Product Price Spreads Over Crude Oil Reflect Product Market-Based Volatility
Notes:
- Product markets can create price volatility apart from crude oil volatility.
- Distillate provides a good example of product volatility apart from crude oil and raises an interesting question -- why did we see such a price spike in early 2000 and not this past winter?
- The difference between heating oil and crude oil spot prices tends to vary seasonally; being higher in the winter, when demand for distillate fuels is higher due to heating requirements, and lower in the summer. However, other factors affecting supply and demand, including the relative severity of winter weather, can greatly distort these “typical” seasonal trends.
- Note that when crude oil prices bottomed out during the winter of 1998-99, margins were very low, discouraging production. As crude prices increased, they outpaced product prices and margins remained low until the dramatic “catch up” in late January and early February 2000.
- By contrast, margins this past winter have been very high all winter, but we did not see a dramatic price price increase. Those margins were key to helping to prevent a price spike.