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It's 'margin madness' for gas retailers: analyst

Alexis Christoforous

If you think a spike in crude oil prices means gasoline retailers are lining their pockets, think again.

In the immediate aftermath of the drone attack on two major Saudi Arabia oil facilities, crude shot up more than 14% Monday to close at $62.90 a barrel. The price pulled back by the end of the week to just under $59 a barrel, but that’s still about $3 above where it was before the attacks.

Denton Cinquegrana, chief oil analyst at Oil Price Information Service (OPIS), says the reality is that soaring global prices often inflict pain on U.S. gasoline retailers, especially if they rely on unbranded gasoline for their fuel. He says that creates “margin madness” for the gas retailers.

“You had wholesale prices move up significantly,” Cinquegrana told Yahoo Finance’s “The First Trade.” “Retail prices have reacted, but not by the same amount and that squeezed the retail margin, so those guys are taking a little bit of a beating following a strong summer.”

When it comes to pricing power, Cinquerana said gas retail wholesalers, like Costco (COST) and BJ’s Wholesale Club (BJ) are better positioned than their smaller rivals.

“Those guys are always going to be the most aggressive guys on the street. They move so much fuel they have some of the best in practice buying strategies. They’ll continue to be more aggressive on the pricing side than their competitors,” he said.

The rise in prices depends largely on how quickly Saudi Arabia can replace the affected oil.

In a note, OPIS said if the Saudi production cuts persist, states along the Pacific Rim will see the tightest supply: “California and Washington refiners, for example, will have to compete with China, Japan and South Korea for limited barrels since much of the Saudi crude went to Asia/Pacific markets.”

Trickling down to the gas pump

We’re starting to see higher crude prices trickle down to the gas pump. Nationwide prices are up about 10 cents per gallon in the past week to average $2.67 for a gallon of unleaded, according to AAA.

Cinquegrana said we should expect gas prices to rise another 5 to 10 cents per gallon over the next week, before stabilizing. Some analysts expect that number to go much higher, predicting a jump of 25 cents per gallon before prices level off.

What oil analysts do agree on is that any rise in gas prices will most likely be short-lived because the U.S. produces so much of its own oil domestically.

Streets in Old Town are flooded as heavy storm bands continue to batter the region Thursday morning, Sept. 19, 2019, in Beaumont, Texas. The remnants of Tropical Storm Imelda unleashed torrential rains in parts of Texas, prompting hundreds of water rescues, a hospital evacuation and road closures as the powerful storm system quickly drew comparisons to 2017's Hurricane Harvey. (Kim Brent/The Beaumont Enterprise via AP)
Streets in Old Town are flooded as heavy storm bands continue to batter the region Thursday morning, Sept. 19, 2019, in Beaumont, Texas. (Kim Brent/The Beaumont Enterprise via AP)

In addition to the Saudi Arabia attack, oil traders are concerned about the impact to refineries in southern Texas, where Tropical Depression Imelda has dumped more than 30 inches of rain in come cities.

“You have a couple of different factors potentially lifting the market. I still think there’s more upside to come,” said Cinquegrana.

“The last 100 days of the year tends to see retail gasoline prices really start to fall off, and that’s when you have your cheapest prices of the year,” he said. “I don’t think we’ll see that typical drop-off this year.”

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

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