GAITHERSBURG, Md. — Think of the oil markets as a vast ocean, but as a body of water that can move from tsunami-like conditions to glassy calm torpor on a regular basis. The just-completed decade saw incredible distance between the crest and troughs of pricing waves, and the 2020s may ultimately provide much of the same.
Indeed, the first eight business days of 2020 saw $8 per barrel separate the lows and the highs for crude, and diesel and gasoline have had more than 20 cents per gallon (CPG) worth of variability. But compare that with the $90 barrel that separated the nadir and apex of crude oil in the past decade or the more than $100 per barrel that separated low and high tide in the 2000-2009 period. Volatility comes at a head-spinning rate, and it manifested itself like Linda Blair in "The Exorcist" as this decade began.
If you want to win a bar bet, tell someone that nationwide retail gas prices slipped under $1.70 gallon in 2016 after cresting just below $4 gallon in 2011. That difference of nearly $2.30 per gallon in the national numbers paled when compared to the more than $3 per gallon that separated California pump prices. And if you want to look at the volatility of the middle years of the decade, recognize that gasoline futures fetched just 64.59 CPG on Presidents Day 2016 but topped $3.42 per gallon during the full fury of the Libyan meltdown of 2012.
I don’t expect similar extremes in 2020. Ultimately, the decade may deliver some Roaring '20s, but we might start out with some “boring” quarters. Here are several things to watch for in the new leap year that could have a major impact on the fuel category for convenience retailing ...
1. Crude will have a much more graceful 2020 entrance than exit
The international Brent benchmark may have indeed flirted with $72 per barrel as the year commenced, but Oil Price Information Service (OPIS) sees a stumbling path for crude oil numbers in 2020. Don’t be surprised if the “exit” price next December is $12 per barrel or more below the entry number.
2. Reports about the death knell for fossil fuels are premature
Electric vehicles (EVs) will do little to displace gasoline or diesel in 2020, and U.S. crude oil production will grow. The rate of growth may slow from 1 million barrels per day (bpd) year on year, but it will still surge by 400,000 bpd to 700,000 bpd.
3. The 'incredible lightness' of crude will affect global products demand
Simply put, very sweet and very light crude leads to too much gasoline production. Spot and futures prices for gasoline will have some profitable months, but gasoline will be an unwanted hydrocarbon among refiners for much of the year.
4. Western regions will stay high—but don’t get higher
Wholesale prices for gasoline were considerably higher in West Coast and Rocky Mountain markets in 2019, and that will be the case again this year. But it’s doubtful the regions will sell for $1 per gallon or more above NYMEX futures, as was the case in spring and summer 2019.
5. Retail prices for the country will be very similar to 2019
The $4-per-gallon price point looks excessive even in California, but many of the other regions will occasionally see prices fall to $2 per gallon or lower after the driving season. On balance, we see the average U.S. price slipping a few pennies from the 2019 annual average number of $2.60 per gallon. It will be the sixth year of relatively cheap gas, after high prices prevailed from 2011 to 2014.
6. The diesel price apocalypse won’t happen
Wholesale diesel prices will occasionally be 40 cents per gallon or so higher than gasoline. Some of the lift is related to the International Maritime Organization (IMO) rules that dramatically cut sulfur for marine vessels, but the diesel pricing apocalypse predicted by some analysts will not occur.
IMO will siphon some hydrocarbons that would normally go into the diesel market, but nearly all that action will be on the coasts. Don’t be surprised to see diesel sell for 40 to 50 CPG less in midcontinent locations than on the coasts.
7. Biofuels will go boom
The extension of the $1-per-gallon biodiesel tax credit (BTC) that moved through Washington in December will motivate plenty of higher bio blends, even before renewable diesel gets its running start. In particular, look for many “blue” states and agricultural states to embrace “green” fuels.
8. Fuel sees a new normal
Gasoline margins for chain retailers and distributors ended the past decade with a renaissance. The profitability of fuel will linger in 2020, particularly for unleaded regular.
Speaking of regular, the market share of premium won’t move much, although high-octane gasoline will fetch more in the spot markets. Major refiners have been able to pocket much of the 55 to 60 CPG that premium commands in some wholesale markets, and those markups may take a hit.
9. Private equity’s love affair with U.S. retail assets sticks around
Most of the noise at the end of the past decade came with purchases by Brookwood Financial Partners of Allsup's and ArcLight of Thorntons, but there are plenty of other investment funds aggregating convenience assets. First Reserve, for example, has a history of $1 billion or higher investments, so their measly multimillion foray into South Carolina c-stores may lead to much bolder ambition.
10. Gasoline demand won’t crumble, but it likely won’t surge
This is despite more drivers and more vehicle miles in U.S. Department of Transportation measurements. The difference between annual gasoline demand in 2017, 2018, 2019 and 2020 will amount to a rounding error with 9.3 million bpd a reliable estimate for all four years. Declines in demand start to really affect the business around 2022-2023.
Notwithstanding that prediction, gasoline consumption is getting lumpier. About 1.1 million bpd separated the nadir (January) and peak (August) for demand in 2019, and that lumpiness will prevail and perhaps even intensify.
11. More convenience assets are headed for public stock exchanges
That said, 2020 will probably be a transitional year. Within the next 30 months, we should see the public debut of an independent Speedway and might see Yesway on an exchange in a similar time frame.
12. The dealer tankwagon price returns
Given the notion that gasoline will be a surplus product in many months of the year, refiners and multistate marketers are targeting individual direct dealers. This action may bring an outcry from jobbers facing “disintermediation,” but companies want dedicated homes for their motor fuel gallons.
13. Disconnects from futures is a continuing theme
The New York Harbor contracts for RBOB (reformulated blendstock for oxygenate blending) and ultralow sulfur diesel (ULSD) bring liquidity and transparency, but other less liquid markets will stray widely from benchmark futures. Hedging fuel costs in most sections of the country will be an art and not a science.
Final thoughts
Here are some other fuel trends to watch for in the coming years:
- Look up the country of Guyana and you’ll find that it will be a major contributor to world crude oil throughout the next decade.
- Keep the rule of seven in mind and recognize that most major oil projects take seven years to result in barrels coming to market.
- When we rendezvous with the price crash of 2015-2016 in, say, 2022-2023, we may see global supplies tighten like they did in 2011.
- And then there’s carbon and the effort by states and local government to take action to diminish the carbon footprint with cap and trade or similar programs targeting fuel.
That's enough for now. It promises to be a dynamic year and decade, but many of the highlights 10 years hence will properly be regarded as unpredictable if not unprecedented. (To read OPIS' 2020 Outlook Report, click here.)