Besides promising an increase in the quality of hair vs. that offered by speakers such as Walter Zimmermann and Todd Hale during the first day of the NACS State of the Industry Summit, OPIS chief oil analyst Tom Kloza vowed to take retailers “beyond the screen” during his “Motor Fuels Overview” general session.
When it comes to the oil business, simply following the futures market on CNBC, Bloomberg or Fox Business is not enough, Kloza said: “There’s a lot more than what meets the eye.”
While what’s happening “beyond the screen” is affecting fuel retailers, it’s not always being covered accurately, he pointed out. While the U.S. Energy Information Administration (EIA) would suggest that there was a 0.5% to 1% increase in gasoline demand last year, OPIS’ data suggests there was actually a 5% to 7% drop in demand compared to recent years.
One possible reason for the discrepancy? Organizations such as OPIS and NACS (whose numbers also disagreed with the EIA projection) get their data from actual retailers.
“I think EIA does a great job at most things,” Kloza said. “But I think measuring volume by how much is leaving terminals vs. how much is actually being sold at stations is a bit of a fool’s errand.”
Logistic-Centered Supply
“The markets you deal with every day are totally dependent upon logistics,” Kloza continued. “Logistics rule North American volatility right now. When you get into the different markets where you operate your stores, there’s as much diversity downstream as we’ve ever seen. It’s really wreaking havoc, led by changes in logistics.”
In a glance at the futures market, 2013 seemed to be a great year to be in the crude business, with crude oil an average of $100 per barrel at the end of the year. Yet in Alberta, British Columbia, crude was barely selling for $60 per barrel because of logistical issues such as Canadian refineries going down and a pipeline not transferring as much product as it was supposed to.
“It used to be a single reaction when something happened with the logistics: If a pipeline or refinery went down, prices would go higher for gasoline,” said Kloza. “Now there’s all this new crude oil waiting to go to market, so when a pipeline or refinery goes down, the price of the crude may drop $10 to $25 a barrel. And virtually no one sees it; it’s not covered by CNBC or Bloomberg, and it’s really something that’s covered only by people who go beyond the screen and look into regional prices.”
Retailers in Florida or Georgia are already well versed in these logistical nightmares, thanks to this year’s polar vortex and the usual problems that accompany the Gulf ’s hurricane season.
“We’ve already had events this year where we’ve been at the mercy of logistics,” Kloza said. “A lot of places are so dependent on one singular refinery that if it goes down, you want to load up on fuel to the extent that you can, because there will be temporary (price) spikes.
“The ‘just-in-time inventory’ issue is not getting any better,” he continued. “We really have little inventory downstream, and things can happen quickly if you’re in downstream markets. We just don’t have the juice that we used to have.”
Dwindling-Demand Challenges
The logistical pricing game is in part is due to the fact that North America is producing more crude oil than ever before; the influx of supply means the crude can be sold at very distressed prices. That crude needs a market.
Despite what they claim, Kloza said, refiners are not hurting in the current environment.
“Breaking even is not currently threatened,” Kloza said of the refineries. “They’re making money. You’re getting more exploration in production and new ways to bring the oil to market. When the price suffers, the price is suffering because of logistics, not production.”
In fact, it’s a great time to be in the refinery business—something Kloza urged retailers to take advantage of.
“[The year] 2013 was a wonderful year for refiners,” and it looks as if 2014 will be equally successful, he said. “It’s great to be a United States refiner because natural gas is so cheap and because there’s so much crude oil that’s less than the prices you see on the futures market. If you have a good crude-oil logistics person, you can save so much money.”
However, U.S. demand may not always be able to keep up with the growing amount of crude produced in North America.
“Most of us have lived against the background of uncertainties about supply. Over the next few years, we’re going to be dealing with uncertainty about demand,” Kloza said. He estimates that production of North America crude should reach 9 million barrels a day by late 2014 or early 2015, and 9 million to 10 million a day between 2016 and 2020.
“A day of reckoning is coming,” he said. “You’ll hear people say now that we need to export this crude or we’re not going to have a market for it. That’s going to be true, but probably not until at least 2016.
“The only way we’re going to have an apocalyptic, sustained rise from the fundamental demand is if the United States were to declare war on Alberta,” Kloza continued. “You never know—John McCain seems to want one more war somewhere.”
Wars with Canada aside, this “day of reckoning” is further compounded by the dwindling fuel demand in the United States.
“It’s an uphill battle in terms of gas demand for the next few years,” said Kloza. “We’re challenged just like Gen. Custer was challenged the morning of Little Bighorn—these are some big issues we’re facing.”
Some of the most significant fuel challenges include:
▶ Fewer Cars on the Road: The average recently dipped to fewer than two vehicles per household.
▶ Less Income Spent on Gas: OPIS predicts household income spent on gas will drop to $309 million in 2014. “Though the percent is pretty decent,” Kloza said. “It’s not to be blamed on the economic climate we’re seeing right now.”
▶ Better Fuel Mileage: Cars now gets an all-time-high average of 25.4 miles per gallon. “It’s something we’re all going to have to deal with in a lot of different ways,” Kloza said.
▶ Tech Advancements: We’re not yet seeing high-speed rail or even fuel models that are popular in Europe, but those changes are coming. “You have a lot of technology that’s going to be adopted and really change gasoline demand in the coming years,” he said.
▶ New Car Boom: Yes, it’s good for fuel demand that people are keeping their cars around for longer periods of time. However, Kloza points out that this means it won’t be long before people trade in those old cars for newer, more fuel-efficient models. “We’re going to be using a lot less gasoline than we are right now,” he predicted.
▶ Population Decreases: Baby boomers are starting to hit retirement age (thus spending less time on the road) and there’s not enough drivers in the highly desired 35-to-54 “sweet spot” age bracket to make up for that loss in fuel. Over the next seven years, the number of drivers in the 35-to-54 demographic will decline by 3.8 million.
But it’s not all bad news: Demand for traditional gas might be going down, but not diesel.
“Diesel demand is moving higher,” said Kloza. “I tell people they should really have it, if they don’t already.”
Kloza on the Future
Kloza had a few other pieces of advice for retailers. His predictions for 2014 and beyond:
▶ Seasonal Pricing Continues: “Don’t be surprised to pay 80 cents less for your gasoline in October than you do in February,” he said. “Don’t be surprised if you’re in a state close to the Gulf Coast and paying 80 cents more in September because of hurricanes coming. That’s the kind of market we’re dealing with.”
▶ Tough Times For Eastern Retailers: “We’re going to see a number of European refineries close down, which is going to have a regional impact on the Northeast,” Kloza said, estimating that as many as 10 European refineries could shut down in the next five years. “It’s a much different picture on the East Coast than for those who buy gasoline from U.S. refiners. The East Coast will be very disadvantaged when these European refineries close down, no question about it.”
▶ “RINSanity” Waning: “For those of you who follow RINs and renewable-fuel instruments, there’s a lot of buzz about what Washington’s going to do,” said Kloza. “But if you look at it right now, the prices are quite high. Essentially, nothing that’s been proposed has gotten away from that big cut in corn ethanol announced last October. There’s not a strong sympathy for Big Corn in Washington.”
▶ Steer Clear of the Futures: “It’s very dangerous to use the futures market— the futures markets don’t reflect regional and local dynamics. There’s a real disconnect between the paper and the wet markets. You really have to go behind the screen to see this.”
It wasn’t all good news, but Kloza said 2014 gave him plenty of positives to talk about vs. years past.
“It’s different now,” he said. “I can be kind of a motivational speaker, as opposed to past years when I’d bring everyone down.”
Domestic Fuel Demand Trends & Predictions
While the economy has rebounded some since the recession, by 2020 motor-fuel demand could be at its lowest since 1996.
| Year | Gasoline Demand (millions of barrels per day) | Distillate Demand (millions of barrels per day) |
| 2013 | 8.767 | 3.875 |
| 2014 | 8.769 | 3.906 |
| 2015 | 8.755 | 3.945 |
| 2016 | 8.670 | 3.992 |
| 2017 | 8.516 | 4.042 |
| 2018 | 8.337 | 4.097 |
| 2019 | 8.158 | 4.152 |
| 2020 | 7.973 | 4.208 |
Source: Turner Mason 2014 Outlook
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