Canadian Gasoline Prices Likely To Stay Above West Texas Intermediate Prices

Canadian gasoline prices are expected to remain elevated compared to WTI crude prices, based on a persistent discount for Brent prices, says the Bank of Canada.

The central bank said the price of West Texas Intermediate (WTI) crude, which is the main U.S. benchmark for oil, has traditionally been a good proxy for the crude cost of Canadian refineries and an accurate gauge of gas prices.

However, since the beginning of this year, this relationship has deteriorated. Not only has the price of gasoline increased by more than the price of WTI early in 2011, it has largely failed to drop alongside falling WTI prices since the spring.

"In September 2011, gasoline prices were about twenty percent higher than their historical relationship with WTI would suggest, a difference amounting to an additional 1.2 percent on the level of CPI," the Bank said.

The recent dislocation can be explained by the wider spread between WTI prices and Brent crude prices, which is the main benchmark outside of North America. The current price of WTI is roughly $87-US per barrel versus $109-US per barrel, a discount several times larger than is normal.

While refineries in central Canada rely mostly on oil priced off WTI, refineries on both the coasts tend to use oil based on Brent prices.

"Historically, the relative use of these two types of crude did not matter in determining the average cost of crude oil for Canadian refiners, since the prices of the two crudes tracked closely together," the Bank said.

Based on oil-price futures, the central bank added that the discount on WTI relative to Brent is expected to persist until 2016. Thus Canadian crude costs are expected to remain elevated relative to WTI, affecting gasoline prices and the total CPI for some time to come.