Have you noticed prices at the pump lately? In my area, gas went from $1.39 per gallon to $1.79, even while crude oil prices are floundering below $40 per barrel.

There seems to be a significant divergence of crude oil prices as compared to gasoline, and it’s indicative of a shift between demand for crude oil and production output of refined products.

Refiners margins have been down recently due to the drop in crude oil. During the fourth quarter of last year, the price of a barrel of crude oil was actually more expensive than a barrel of unleaded gasoline (remember there are 42 gallons in a barrel). That meant that the refineries were paying more for the raw material than they were selling their product for. Hence, the drop in refiner stocks, such as Valero (VLO: chart, web, Y!) and Tesoro (TSO: chart, web, Y!).

Now that oil prices have started to stabilize around $40 per barrel, and refiners have taken delivery of their crude purchased for much higher prices, they’re starting to increase their margins by cutting production.

In the first week of January, refined gasoline totaled 9.1 million barrels per day.  By the end of the second week of January, total production was 8.8 million barrels per day, a 300,000 barrel per day drop in refined products.

Demand has been dropping for the last three weeks, and demand on January 9th hit 8.75 million barrels per day.  So production is just keeping up with demand, and no more.

Gas prices typically lag crude prices by a month; two depending on how futures contracts play out.

Corner Office Commentary

If oil prices continue to trade between 35$ and $40 per barrel for the next two months, I would expect gasoline prices to start to turn the corner and head down at the beginning of February.

The change in refined product output should run its course by the end of this month, so long as more output cuts are foregone.  Even then, once the refiners build margin back into their books, we should see gas prices stabilize.

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Another example of economic short-term memory.

Crude prices are continuing upward, as today Nymex Crude closed just shy of $90 per barrel. But in contrast to previous spikes, we’re not hearing the political sounding board in Washington cry for windfall profits taxes, and the talking heads are not aghast with news of gasoline shortages…

Oil is up 8% just in the few weeks since the Fed cut interest rates to bail us out of the credit crisis, and in the process fueled one of the strongest commodities (pardon the pun) we’ve seen in a long time as the thought of a higher inflation rate suddenly improved.

I find it interesting that even as crude oil is setting new records, gasoline prices have yet to follow suit.

Perhaps this is why no one really cares about the price of oil right not…

Just wait.

Oil & Gas commodities, crude chart, crude oil, gasoline, oil prices, WTIC