WALL, N.J. -- Autumn has been kind to convenience-store retailers in terms of fuel margins in the past few years, but it will be difficult for 2016 to live up to the spectacular performance of fourth-quarter 2014 or 2015.
Futures markets, for example, are orderly only when speculative parties on both sides of the business are willing to buy or sell. The establishment of a mere outline for an Organization of the Petroleum Exporting Countries (OPEC) production cut at the Algiers meeting Sept. 28 was probably enough to “spook” potential short sellers. Any cartel cuts won’t take place until late in 2016, but a new kind of “worry premium” may be witnessed until the formal OPEC meeting Nov. 30. Call it a “worry premium that some OPEC countries may actually cut production.”
Clearly, the action of OPEC and perhaps Russia are the major focal points for the first month or two of the fourth quarter. But here are some other points to ponder as marketers head into a period that has been traditionally lucrative for fuel margins.
1. Oil prices
Third-quarter futures prices for West Texas Intermediate (WTI) averaged $44.85 per barrel, representing the lowest penultimate quarter since 2004. Third-quarter futures for RBOB (Reformulated Blendstock for Oxygenate Blending) averaged less than $1.40 per gallon, also hitting a 12-year low for that summer period.
Last year, crude oil struggled in the fourth quarter, with an average of just $42.15 per barrel, while RBOB barely topped $1.31 per gallon. As October begins, those benchmark futures carry premiums of about $5 per barrel, and 11 cents per gallon (CPG), respectively, to year-ago numbers.
2. Refinery output
October brings the peak global period of refinery maintenance, and one should expect plenty of hype about lower output domestically and abroad. However, we’ve added 2 million barrels per day (bpd) of refining capacity in the United States since 2000, so there is much more equipment to soften the blow of turnarounds. Under normal circumstances, refinery work might depress crude-oil prices, but OPEC’s promises could keep would-be sellers on the sidelines.
3. Gasoline demand
According to the Energy Information Administration (EIA) and the analytical teams at most investment banks, U.S. gasoline demand will break the all-time record established in 2007 of 9.286 million bpd. So far this year, EIA numbers show a 2.5% advance in gasoline demand. However, OPIS Demand surveys do not match the brisk “lift” that the EIA has been consistently reporting. For example, OPIS’ exclusive survey of about 10,000 stations shows a driving season gain of just 0.6%.
4. Fuel margins
A year ago, gross gasoline margins averaged 22.5 CPG, 23 CPG and 18.2 CPG in the three months of the fourth quarter. In 2014, the three months collectively saw a gross margin of more than 31 CPG. Descending global oil prices reward downstream marketers. Stable or ascending global markets do not. All signs point to the most challenging fourth quarter for gasoline marketers since 2013.
5. C-store valuations
Will a tougher margin environment affect the valuations for c-stores? This year saw spectacular “multiples” paid for the CST properties and also for the shocking purchase of Mapco Express by the Chilean company COPEC. A very strong margin environment along with cheap financing has driven these values higher. If the Federal Reserve raises interest rates in December, these two drivers could get dinged.
6. E15 rollout
The upcoming quarter will be the “pilot” for the most significant rollout of a new fuel since E10 was introduced. By many counts, more than 500 pumps will dispense E15 before year’s end. One month ago, the combination of modestly priced ethanol and high RINs (Renewable Identification Numbers generated by gasoline blending) created economics in which retailers could price the blend at 10 CPG under 87 octane E10. The economics have shifted to where this edge is now about a nickel.
7. Market rebalancing
Will investors still show confidence in oil? Up until the announcement of a “framework” for a coordinated crude production cut, the large investment houses cut positions in oil, losing patience with a rebalancing process that could stretch well into 2017 or beyond. If the Nov. 30 formal OPEC gathering exposes riffs that have long haunted the cartel, there could be a dash for the exits from financial parties.
You can further explore the M&A climate at the OPIS Petroleum C-Store M&A Fundamentals summit, to be held Dec. 6-7 in New Orleans. Click here for more information.