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Oil is Cheap & Plentiful — Why is Gasoline Rising?

Oil is relatively cheap, supplies are more than ample (some analysts fear we're awash in crude), so why am I paying more at the gas pump than I was a month ago?

Today the national average for regular unleaded gasoline hit $1.90 a gallon, the highest price we've seen since last November. Retail gasoline prices have risen more than 30 cents since the beginning of the year, up nearly 14 percent, while oil prices have fallen about 13 percent in that same time period. And the price at the pump..?

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Price gouging by Big Oil? Not so fast. Traditionally, gasoline supplies start to decline from February to May, as refiners switch their processing systems from making the winter grade of gasoline to the summer grade and make room for the summer fuel, explains John Felmy, chief economist at the American Petroleum Institute. As a result, gasoline prices start to rise during this time.

Yes, demand is lower than it was a year ago, but the latest data from the U.S. Energy Department shows it's only down about 0.5 percent over the past four weeks compared to the same period a year ago.

There seems to have been a slowdown in the decline, and expectations are for demand to ramp up by the summer, even if it's not as strong as it has been in years past.

Meanwhile, due to the decline in demand, refiners have already planned to scale back operations during this traditional "turnaround" season a bit earlier and extend maintenance operations a bit longer. Many analysts, including Stephen Schork of the well-regarded industry newsletter The Schork Report, point to the refiners lack of production, particularly on the East Coast, as a major reason for the rally we've seen in gasoline futures over the past couple of days.

Schork calls it "production destruction" and says it's likely to last well into March, with wholesale gasoline futures well-supported as a result. Indeed, RBOB gasoline futures traded at the New York Mercantile Exchange have risen 10 percent in the past month, and that's a much better indicator of what we'll be paying at the pump than crude oil prices.

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