Over the past year, NYMEX RBOB and heating oil futures have moved in lockstep with ICE Brent futures, reflecting what analysts call the world oil market.

NYMEX RBOB futures, as of the week ending September 9, were 40.1% higher than the period a year earlier. At the same time, ICE Brent futures were up 44.2% over a year-ago, while its US-based counterpart NYMEX WTI was up only 14.9%.

"It's a global economy and when you buy gasoline it's not just you in your local town and state that is competing for a marginal barrel of crude," said Adam Sieminski, chief energy economist at Deutche Bank AG. "The price [of gasoline] is what people are willing to pay somewhere else and people in China are willing to pay."

While it may be circumstantial, the smoking gun in the oil complex, said Tim Evans, analyst at Citi Futures Perspective, is ICE Brent, which he said only accounts for 21.4% of the global oil futures market but has managed to capture the US product markets that are traded for New York Harbor delivery.

"If US consumers want to drive cars then they are going to have to pay up," said Evans, who noted that US retail gasoline prices are running some 35% above year-ago levels.
"There is no price relief despite the fact that people are driving less and that is because the price of Brent is expensive."

Gasoline demand readings in the US have been dismal as the futures market continues to chug along. Finished motor gasoline demand at 9.229 million b/d for the week ended August 26 was down 157,000 b/d from a year-ago, while front-month RBOB futures were trading around $2.74/gal as of September 12, far above the lows seen in December 2008 of around 78.5 cents/gal.

For retail gasoline, consumers have seen prices rise by nearly a $1/gal from a year ago.
US retail gasoline prices averaged $3.727/gal for the week to September 5, up from $2.735/gal during the same week in 2010, according to the EIA.

For Brent, the push higher comes as the European-based contract breaks farther away from WTI. The WTI-Brent spread settled at an all-time high of minus $26.04/b on August 31 and continues to hold near that level. About a year-ago, the spread was trading around minus $2.72/b.

Sieminski said Brent is reflecting a world market where some 1.6 million b/d of Libyan oil production remains offline.

"On the other hand, WTI is reflecting a 100-mile radius around Cushing, Oklahoma. WTI is landlocked and the low prices for WTI are a function of an economy of the mid-continent," said Sieminkski.

Crude stocks at the NYMEX delivery point at Cushing rose to an all-time high of 41.896 million barrels in the week to April 8, but have declined since to about 32.689 million barrels as of the week to September 2. Still, Evans said that Brent's apparent dominance in the market is not based on oversupply at Cushing or the idea that the Brent market has grown more quickly than WTI but rather its relatively small size and sensitivity to international events.

"It's a more sensitive barometer because its only 21.4% of global trade and it doesn't take as much trade flow to take it higher," he said.

The tendency for RBOB to follow Brent comes as US Atlantic Coast refiners buy crude oil feedstocks at Brent-related prices.

"Product imports to the New York Harbor market are at a Brent-related cost and US distillate exports from the US Gulf Coast are also being sold at Brent-related prices," Evans said. The reason imports and exports are Brent-based, Evans noted, is that if buyers are purchasing at a premium to Brent then sellers are doing the same.

The RBOB crack spreads reflect RBOB's connection to ICE Brent. The crack at $4.09/b as of September 12 is only 6 cents above levels seen during the same period in 2010. However, basis WTI, the crack spread has blown out to more than $29/b from levels close to $6/b in September 2010.

Still, recent statistics in the US show that imports of gasoline have fallen more than 20% from a year earlier. US Energy Information Administration data showed US gasoline imports were at 597,000 b/d for the week to September 2, down from 1.083 million b/d a year-ago.

"Imports are down because they are expensive and US demand for fuel is weak, but we are being led by the nose by the Brent crude oil market," Evans said.

Jeff Lenard of the National Association of Convenience Stores said over the next 10 years, gasoline demand is expected to fall even further. "We could see a roughly 20% drop in petroleum transportation fuel demand," said Lenard.

The drop is based on more diversity of fuels that are coming into the market including electric cars and compressed natural gas vehicles. Also, he noted that better fuel efficient cars will also add to weakening demand. But one of the main culprits is the current 9.1% unemployment rate in the US, which translates to less driving and less refueling.

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