How Spot Prices Affect Rack Prices Imagine you are a refiner. You produce gasoline at your facility and then put it into a pipeline to send “downstream,” where wholesalers, jobbers and end users buy it at a wholesale rack. Now, imagine you have a fire at your refinery that causes you to make less gasoline. How do you make up the difference? Remember, you, as the refiner, have fuel contracts with your customers, who are retailers or large end users, that you must honor. So, you’re in a real pickle – you need to make up lost production. You must go out and replace those barrels through purchases in the spot market. Refiners view spot barrels as “replacement barrels.” They view spot prices (remember, NYMEX +/- differential = price) as “spot replacement costs” – what it would cost them on any given day if they had to go into the market to buy lost supply. A refiner’s calculated spot replacement cost changes every day based on the movement of the NYMEX and the corresponding movement in the spot market. They track that fluctuating cost throughout the day – every day. Refiners increase or decrease their daily rack costs based on the average daily change in their spot replacement cost. That’s why rack prices move up and down! Spot-to-Rack Economics Cost + + $ = to Refiner Spot Price Cost to send fuel from Extra fees refinery to rack A spot price increase or decrease day-to-day changes that equation AND impacts the refiner price at the rack. Fuel Buying 101, Part 2: Wholesale Rack Markets | Oil Price Information Service (OPIS) © 2020, all rights reserved 14