Fuels Market News Magazine Spring 2018

The fully built up retail price of diesel was $2.79/gallon, 45% of which was the cost of crude. Refining accounted for 20% of the cost, distribution and marketing 16%, and taxes 19%.

Naturally, the closer the buyer is to the refiner (with prices set before taxes, distribution and marketing costs are added), the larger the share of crude oil is in the fuel price.

Therefore, while crude prices and product prices can diverge from day to day and from submarket to submarket, they cannot diverge too wildly and for too long. Imagine a swimmer swimming against the tide. It can be done, for a time, but less forward progress is made if the ocean is going the other way. If diesel prices are rising while crude prices are ebbing, eventually diesel prices will follow crude prices.

There are hundreds of crude oils traded, but two key crudes have emerged as the benchmarks for Trans-Atlantic pricing: West Texas Intermediate (WTI) in the U.S. and Brent Blend in Europe’s North Sea. Both are light (low in specific gravity) and sweet (low in sulfur) crudes. In terms of quality, WTI and Brent are relatively close. We may liken them to TransAtlantic cousins serving as benchmarks in their respective markets. Contracts for the purchase of many other crudes often are based on discounts or premia relative to these benchmark crudes.