As WTI Rallies, Gas Heads Lower

 | Nov 17, 2011 | 6:48 AM EST
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I know many pundits and retail investors are knitting their brows over the big increase in West Texas Intermediate oil prices over the last several sessions, contemplating how that will affect the U.S. recovery and retail stocks. Well, here's the bottom line takeaway: Gas prices at the pump are actually headed down. That's right. This is a climb in oil that won't be accompanied by a rise in the prices of hydrocarbons we really care about -- gas, heating oil and jet fuel.

Read on if you want to know why.

Since close to the start of the year, oil had been streaming into the delivery point at Cushing, Okla., because of technical and financial reasons. This is also the delivery point for the WTI futures contract, which is traded at my old home at the Nymex. Because of this, WTI crude had in fact been trading at a distinct discount to real world prices for global crude -- at one point as much as $30 a barrel cheaper. That's despite the fact that WTI crude is some of the most desirable crude in the world, and that it historically trades at a premium to most all other grades on the planet.

I've been beating a drum for close to a year now, and I'll say it again. WTI crude -- quoted around the media as "the price of oil" -- was actually irrelevant to the price for global oil, and did not represent what people and companies were paying in energy costs.

Drawdowns in Cushing over the last several weeks by barge, truck and donkey cart have lessened the glut of oil there, and have caught a few funds that were long the disconnect. The final straw to this outrageous discount of WTI crude to the rest of the world came Tuesday, when Enbridge (ENB) announced it was preparing to reverse the flow of the major pipeline that runs from Cushing to the Gulf Coast, which until now had been only flowing northward and adding to the glut.

This turnaround of flow isn't scheduled to begin until the second quarter of next year -- and, quite frankly, the timing stinks to high heaven. This Seagate pipeline, until yesterday controlled by ConocoPhilips (COP), was clearly adding to the surplus in Cushing and helping all of the majors capture a tremendous refining margin -- paying low, low prices for input crude while charging nice and high prices for refined gasoline. Now that Conoco is planning on spinning off their refining business and divesting other assets, one that can go is the Seagate pipeline -- to Enbridge, which quickly announced its plans to turn the flow around.

There's plenty of other pressure to turn the flow around, too, not the least of which comes from the tremendous arbitrage between Cushing crude and Gulf Coast crude, less than 800 miles away and still $15 more expensive. Another pipeline, the Wrangler, is scheduled to be built and go into operation in 2013. It's set to take advantage of the increasing supply coming south from the rapidly expanding Bakken and Keystone XL pipeline, which I still am sure will be approved after the 2012 presidential election.

The oil companies and refineries have run this dog just about as far as it could go, getting almost a year of terrific downstream profits from this silly Cushing surplus. Now WTI oil is beginning to price itself like every other grade of sweet crude on the planet -- well above $100 a barrel.

But to prove that this rally in WTI will not affect the pump price much, I just need to show you these two charts. One is of the trajectory of WTI prices in the last week. and the other is of New York Harbor gasoline.

West Texas Intermediate -- December 2011
Source: TradeStation


New York Harbor Gasoline -- December 2011
Source: TradeStation

As you can see, they have been headed in opposite directions.  

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