Gas prices 'way beyond' where oil rebound should have them: BMO

Gas prices are up by more than a third since the start of the year, a figure much higher than one would expect based on the slight rebound in oil prices, Bank of Montreal's chief economist says.

It's not just you: Gas prices are much higher than they should be, energy experts say

Gasoline prices have increased much more than oil prices in the past few months, energy experts say. (Emile Wamsteker/Bloomberg )

Gas prices are up by more than a third since the start of the year, a figure much higher than one would expect based on the slight rebound in oil prices, Bank of Montreal's chief economist says.

Doug Porter noted Thursday that while everything connected to crude oil has looked execrable since the slowdown that started last fall, Canadian gas prices have been especially loopy because of the impact of the Canadian dollar.

A lot of the gasoline used in Canada is refined and processed in the U.S., where refineries price the base commodity in U.S. dollars. That makes Canadian pump prices doubly sensitive because they are heavily impacted by the value of the Canadian dollar. 

If you balance out the impact of currency fluctuations, "converting oil prices into Canadian-dollar suggests that the jump in gasoline has gone way beyond the move in crude," Porter wrote. "So what's up?"

It's a question many Canadians have been asking themselves, with the average price of a litre of gasoline at $1.20 across the country. Porter noted there are indeed plenty of valid reasons for gas prices to be up a bit. In addition to the small rebound in crude oil, there are seasonal factors at play.

"In each of the past two years, the annual highs for gasoline prices were hit in the fourth week of June," Porter said. We are right on track for that to happen again this year. 

Demand is up

And demand for gasoline is legitimately higher too. Phil Flynn, the senior market analyst at energy research firm Price Futures Group in Chicago, said cheap oil prices last fall compelled most Americans to do what they normally do when that happens — drive more. "When oil prices crashed it stirred demand," he said in an interview. "It's the oldest story in the market."

Flynn said that, while refineries are producing more gasoline than ever, demand for it all is at its highest level since before the economic slowdown of 2008. He noted there are currently only about 23 days' worth of gasoline in storage across North America. That's near the low end of historical averages.

"Demand is getting better because the economy is getting better," Flynn said.

On its own, however, none of that is enough to warrant the level of gas prices increases that many Canadian drivers have seen in recent weeks. So clearly something else is going on.

Porter stopped short of trying to give a reason for the uptick, but noted that it's not like Canadians aren't seeing some of the savings of cheap oil, as gasoline prices as still 10 per cent lower than they were this time last year.

Whatever the reasons, neither man is expecting a pullback in gas prices any time soon. "People always hope for lower gas prices but if it happens now it will be for bad news," Flynn said, "because it'll mean the economy has just hit a wall."


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