US Gasoline Prices: An Unusual Spring – Analysis
(EIA) — Disruptions in crude oil supply resulting from unrest in the Middle East and North Africa have been widely recognized as important sources of oil – and in turn gasoline- price increases since the beginning of the year.
More recently, however, unusually wide gyrations in wholesale gasoline prices have shown that downstream factors closer to consumer markets can also greatly affect prices at the pump. The U.S. Energy Information Administration’s (EIA) national average retail pump prices for regular gasoline climbed from $3.07 per gallon at the beginning of this year to a high of $3.97 per gallon on May 9, declining only to $3.96 per gallon this past Monday.
Increasing crude oil prices were clearly the dominant driver of higher gasoline prices through much of April. But in recent weeks, unplanned refinery outages and concerns over flooding of the Mississippi River and its impact on refinery production and product distribution have added significantly to wholesale, and subsequently retail, gasoline price pressures in most of the United States.
News last week of improved product supplies followed by reports this past weekend of reduced threats to major refinery and distribution systems from opening the Morganza Spillway, caused wholesale gasoline prices to plunge. Retail prices, which lag wholesale price changes, should soon start to reflect that decline.
Changes in crude oil prices and the gasoline crack spread (difference between spot or wholesale gasoline price and crude oil price) account for most of the fluctuation in gasoline prices, indicating pressures on the upstream and downstream, respectively. Marketing, transportation, retail markups and taxes, the remaining components that make up the pump price, do not vary as much as either crude oil prices or the gasoline crack spread. But increases in the gasoline crack are usually somewhat predictable, reflecting seasonal shifts in gasoline demand from January into the peak summer driving months. For example, over the 2000 to 2007 period, prior to the recession that affected gasoline markets in recent years, the Gulf Coast gasoline crack increased about $7.50 per barrel from January to April, or about 18 cents per gallon. Variations in the crack around national or regional norms often arise from local supply or demand variations.
In the last few weeks, however, the average Gulf Coast gasoline crack has increased steeply. Unusual inter-regional variations have also occurred. The price path of the Gulf Coast spot gasoline price and Louisiana Light Sweet crude oil, a widely traded Gulf Coast crude oil similar in quality to the benchmark West Texas Intermediate (WTI) has not been impacted by the transportation bottlenecks currently affecting the value of WTI. The gasoline crack is shown in red. While gasoline cracks for much of 2011 to date were below average and even negative at times, they began climbing back and rose sharply towards the end of April.
Meanwhile, cracks in the Gulf Coast, a major refining center that supplies about 15 percent of Midwest gasoline demand and about 50 percent of East Coast demand, rose to an unusual premium to those of New York Harbor in March, and again in late April. Chicago crack premiums climbed even higher.
An unusually large amount of unplanned refinery outages, both on the Gulf Coast and the East Coast, curtailed refinery production and seems to account for most of the gasoline crack pressure in April. Had unplanned outages been more typical, supply would not have been as tight.
The East Coast lost 17 percent of its operable crude distillation capacity on average during April, and 23 percent of its fluid catalytic cracking (FCC) unit capacity. (FCC units are large gasoline-producing units.) The Gulf Coast had experienced a heavy maintenance period in February and March, and was coming out of that cycle in April when a number of unplanned outages occurred, many towards the end of the month. The Gulf Coast lost, on average, 7 percent of its crude oil input capacity during April, compared to a typical 4 percent, and 9 percent of its FCC capacity versus a typical 6 percent. Some refineries have returned to operation, and barring additional unplanned outages, refineries east of the Rocky Mountains should be running at more normal levels in June.
Although Midwest refineries ran at higher levels during April 2011 than in April 2010, combined gross inputs to Midwest, Gulf Coast and East Coast refineries were about 680 thousand barrels per day (bbl/d), or 6 percent, less than in 2010. This equates to about 340 thousand bbl/d less gasoline production in April 2011 than was available in April 2010.
Gasoline imports did increase, but not enough to make up for the loss of production. For the Gulf Coast, Midwest and East Coast combined, total motor gasoline imports in April only increased 135 thousand bbl/d over 2010. Inventories had to make up the difference.
Gasoline exports may have contributed to market tightness as well, though export data are not yet available for recent months. Total motor gasoline exports have been increasing since 2008 following the recession and softening U.S. petroleum demand that resulted in surplus refining capacity. Exports in 2010 averaged 335 thousand bbl/d, which was 125 thousand bbl/d higher than in 2009. For the first two months of 2011, gasoline exports averaged 470 thousand bbl/d, which is over 200 thousand bbl/d higher than the first two months of 2010. Given low gasoline cracks in the United States at that time, exports may have been more attractive. Although the large increase in U.S. cracks in recent weeks provides an incentive to reduce gasoline exports, contractual arrangements may still be supporting them.
With production low, imports slightly elevated, and likely strong exports until very recently, inventories declined sharply. East Coast gasoline inventories normally fall about 3 million barrels from the end of February through the end of April. This year they fell about 15 million barrels – or 5 times the typical amount. Midwest gasoline inventories fell about 6.5 million barrels, which is slightly higher than the typical 6 million barrels, but since Midwest inventories were somewhat low when the decline began, they ended April well below the typical range. Gulf Coast suppliers were not able to move volumes fast enough into the Midwest or East Coast to ease the price pressure.
Early in May, concerns about renewed supply disruption risks on the Gulf Coast from refinery and pipeline flooding, particularly in Louisiana, brought further price pressure. But last week, with news of some refinery recoveries and the increase in gasoline inventories (for the week ending May 6) on the East Coast, spot prices and cracks began to fall. Finally, as the Morganza Spillway on the Mississippi River was opened this past weekend, waters rose less than expected, implying less potential for serious petroleum supply disruptions. Gasoline spot prices dropped significantly on Monday, May 16, falling about 16-18 cents per gallon in many regions, and about 26 cents per gallon in Chicago. These downturns in spot prices should begin showing up soon in retail prices, as there is a lag between the two markets.
For once, California prices took a back seat to the higher prices east of the Rocky Mountains. On May 10, Gulf Coast spot prices registered their largest premium over Los Angeles prices since September 2008, when Hurricane Ike pushed up Gulf Coast prices. California has not experienced the large levels of outages seen on the Gulf and East Coasts, and California gasoline cracks remain well below levels seen before the recession. But many West Coast refineries are due to undergo maintenance work in May. Likely in anticipation of those shutdowns, West Coast gasoline inventories were built to levels well above average, but may decline if they are used to replace lost production from refinery outages. Given the planned nature of the work, its price impact may be limited. But the region bears watching as planned outages can sometimes take longer than expected, and any large additional unplanned shutdown will tighten gasoline supplies quickly.
In sum, there are reasons to be cautiously optimistic that, for most regions, the summer weekly gasoline peak price may be behind us. However, risks still linger. Flooding concerns are not over, refineries have not returned to full operation, and crude oil prices could again rise as the international markets evolve. Also, West Coast prices may experience some price pressure over the next 2 to 4 weeks as refineries in that region go through an unusually large maintenance period. EIA’s Short Term Energy Outlook , (STEO) published earlier this month, projected June retail prices averaging $3.88 per gallon nationally, about the same as in May, but then easing down over the rest of the summer, averaging $3.76 per gallon during August, the month when many people take their summer vacations. Last week’s edition of This Week In Petroleum discussed a rule of thumb for estimating retail prices from the reformulated gasoline blendstock for oxygenate blending (RBOB) futures contract. Following a sharp drop in RBOB prices since STEO publication, the rule of thumb would imply retail prices as low as $3.60 per gallon, given that August futures are at about $2.90 per gallon.
Retail gasoline and diesel prices decrease
The U.S. average retail price of regular gasoline fell for the first time since March 21, dropping half a cent to hit $3.96 per gallon. This is $1.10 per gallon higher than last year at this time. The biggest decrease came on the West Coast, where prices were three cents lower on the week. However, prices in the region remained the highest in the country at $4.12 per gallon. The Midwest recorded less than a penny decrease from last week’s price. Both the East Coast and Gulf Coast saw small price increases of less than a cent per gallon each, while prices in the Rocky Mountains added more than three cents per gallon for the week.
The national average diesel price fell for the third time in the last 4 weeks, dropping more than four cents last week to $4.06 per gallon. This was the largest weekly decline in the national average diesel price since May 24, 2010. The diesel price is $0.97 per gallon higher than last year at this time. Like gasoline, the West Coast saw the biggest decline, dropping six cents on the week. However, West Coast prices continue to be the highest in the country at $4.25 per gallon. The Midwest average diesel price was down a nickel, while the East Coast price was down about four cents. The average price on the Gulf Coast decreased almost three cents. Rounding out the regions, the Rocky Mountain diesel price was two cents lower this week.
Propane inventories continue to grow
Total U.S. inventories of propane continued to grow last week, as stocks rose 1.7 million barrels to end at 30.5 million barrels. The Midwest region added the largest build of 0.9 million barrels. The East Coast region and Gulf Coast region increased 0.4 million barrels and 0.3 million barrels, respectively, while the Rocky Mountain/West Coast regional stocks grew by 0.1 million barrels. Propylene non-fuel use inventories represented 5.5 percent of total propane inventories.