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With Crude Oil Falling, Why Aren’t Gas Prices Following?


Crude oil closed at $86.45 a barrel, after tumbling 3% on a much weaker than expected August jobs report. While the drop in oil prices should be followed by easing gas prices, the trend this year seems to be breaking.

WTI crude oil hit a 2011 high of $115.55 in April, and has since fallen roughly 25% over the last four months. For those of you waiting to see a similar price plunge at the gas pumps, the real answer is, you might be looking in the wrong place.

"If you overlay a chart of RBOB gasoline and Brent crude, they are practically the exact same chart," says Paul Hickey, the co-founder of Bespoke Investment Group. "So unless we see a decline in the price of Brent, there's not going to be much relief at the pump."

Brent crude is the benchmark classification of oil overseas, used to price about two-thirds of the world's crude supplies. Europe, Africa, and the Middle East use brent crude oil and brent futures contracts are traded at the London-based ICE Futures Europe exchange. In the U.S., our benchmark is WTI crude, traded at the NYMEX.

A glance at the stats from the past 3-months shows WTI crude is down about 10%, while Brent crude and RBOB Gasoline have both held steady and given back nothing.

A long term chart comparing the difference between the price of Brent and WTI shows the current spread of about $25 a barrel is at record levels, according to FactSet Data. This is exponentially higher than the 10-year average gap between the two contracts of about $0.22.

The weak dollar and sluggish domestic economy are partly to blame for this unprecedented pricing phenomenon, an anomaly some say could be the new normal rather than a temporary trend.

Energy traders say that while the WTI contract still gets preeminent treatment in the media and mindset of most Americans, the Brent crude contract is the better barometer for global supply and demand, and will have greater sensitivity to manufacturing and economic data.

And for now, it looks as if it's a better barometer for those of us watching and waiting for lower gas prices.