High Margin, Low Volume

Lundberg looks at the 2008 retail gasoline market

CAMARILLO, Calif. -- On December 19, the U.S. average regular grade gasoline price was $1.6622, down 9.04 cents per gallon from two weeks ago, bringing it to its lowest point in nearly five years, according to the most recentLundberg Survey of approximately 7,000 U.S. gas stations. The last time gasoline prices dipped so low was in February 2004. It is down $2.45 from the all-time record high price of $4.11 this past July 11, and $1.31 below last year at this time. The highest-ever retail price was followed by the biggest [image-nocss] crash in history.

This year overall also proved to be the all-time high for retail margin, nearly 16 cents per gallon for all three grades pooled. In contrast, 2008 has been the worst refining margin on gasoline since 2002, at less than 30 cents. What the two sectors of the petroleum industry have in common is that gallonage is down, thanks to previously high prices and then from the weak economy (and, most grievously, unemployment).

The regular grade retail margin happened to be 11.12 cents on December 19, virtually identical to the annual average retail margin on regular in 2007 (11.11), 2006 (11.17), and 2005 (11.04). So it has normalized in the past two weeks after several months of astonishing highs caused by wholesale-retail lag time, lower demand and persistently bad refining margin. Regular grade retail margin falling back to earth may well be followed by a normalizing in trends of gasoline demand and retail price, with both bottoming out and making modest gains sometime in the near future.

After nearly half a year of falling retail prices, this may finally be the trough. While demand from consumers here and around the world responds to price, crude oil supply is being reduced to some still unknown degree by the Organization of Petroleum Exporting Countries (OPEC) and a few sympathizers.

Refiners have idled some 15% of total capacity, due to poor demand. More refiners are shutting in capacity for pre-spring maintenance. They hope that gasoline demand, still suffering but much less so at these lower prices, will revive nicely by spring, and that any upswing in crude oil prices will be moderate. Gasoline retailers should benefit from conditions that inspire maximization of refinery runs, not continued shut-ins.