GAITHERSBURG, Md. -- As a few gas stations in the Midwest were quickly nearing the unthinkable 99 cents per gallon of gasoline mark, the excitement of finding gasoline for less than $1 was starting to build around the country. The national average for retail gasoline prices has fallen more than a $1 per gallon since July 2015. This coincided with the price of crude dropping more than 50% in the similar timeframe.
Refineries have been excited to take advantage of cheap crude prices. But as crude prices have run out of room to fall much further, refined product prices have continued to plummet. High gasoline inventories, especially in the Midwest, have forced prices to plummet at the pump. As Midwest refiners are selling their refined products, such as gasoline, for less and less each week, the profitability of these refineries continues to dwindle. The economics have gotten so bad that some Midwest refiners are opting to slow down production to limit financial losses.
The news this past week that two refineries are voluntarily reducing rates to save money sent shockwaves across the gasoline wholesale markets. Within three days, Great Lakes gasoline wholesale prices rocketed up 18 cents per gallon (CPG). Dreams of 99-CPG gasoline have seemed to fade, for now. The refiners across the Midwest dug themselves into this inventory oversupply, and now are paying the price in the form of losses on the balance sheet. Refineries in Memphis, Tenn., and Toledo, Ohio, have started the reduced-rate trend; don’t be surprised if more refiners follow suit.
Midwest refiners are left with a couple options to combat losing money at the refinery. The first tool, which we’ve started to see, is to reduce production rates at the refinery. While you’ll still be losing money at the refinery, adding fewer barrels into inventory will eventually perk prices back up. But with gasoline inventories in the Midwest at the highest in 23 years, more refineries are going to have to get on board to make a significant dent in stocks.
The other option refineries have is to move spring maintenance earlier. If you’re going to be losing money at the refinery, might as well shut it down for your regularly scheduled maintenance. While on paper this seems like an easy solution, the reality is refinery turnarounds have to be scheduled sometimes more than a year in advance to secure the manpower and equipment necessary to complete maintenance. These resources are often shared among refineries so these resources could be unavailable for an earlier timeline.
If more refineries use these tools to combat high inventories in the Midwest, gasoline prices could be ticking up weeks earlier than expected.
Will Speer is a senior petroleum analyst at GasBuddy, Gaithersburg, Md.
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