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Fuels

2018 SOI: Fuel’s Certain Future

As supply continues to outpace demand, the outlook for motor fuels looks very familiar

CHICAGO -- This is how the decade ends for motor fuels: Not with a big swing in oil and gasoline prices or a tsunami of electric vehicles (EVs), but with more of the same.

“It’s going to be a very temperate world for the next couple of years,” said Tom Kloza, global head of energy analysis for Oil Price Information Service (OPIS), Gaithersburg, Md., during his presentation on the fuel outlook for the rest of the decade at the NACS State of the Industry Summit. “A lot of what you hear—from pundits on TV, Elon Musk [and] Goldman Sachs talking about excruciatingly high oil prices—is at least premature.”

Granted, Kloza made this prediction the same week that the price for West Texas Intermediate crude hit a three-year high of more than $66, spiking on President Trump’s tweet about sending missiles to Syria. Kloza acknowledged that prices during that April time frame were “a little bit lofty,” with Mideast tensions putting a premium of about $5 to $6 on each barrel of oil.

A Year in Gasoline Margins

In 2017, gasoline margins ranged from 17.5 CPG to September’s 29.7-CPG high, according to OPIS figures.

 

Source: OPIS

That said, the underlying fundamentals of lower prices—led by production outpacing demand—are firmly entrenched.

“I’m going to submit to you that for the rest of this decade, it doesn’t necessarily present the environment for prices taking off again like they did in some previous years,” Kloza said. “It’s a rickety bridge to build prices off.”

Price Perspectives

Despite a recent increase in gasoline prices—the national average hit $2.71 per gallon on April 16, according to GasBuddy, the highest point in nearly 1,000 days—the outlook continues to be relatively moderate.

Thus far, refinery maintenance and turnarounds in 2018 have run very smoothly, which is reflected in the year’s gasoline price trends, Kloza said.

“Gasoline is essentially the dog that hasn’t barked,” he said. “Prices have gone up, especially on the West Coast, but [there has been] nothing spasmodic or that would be called a spike. It’s more slow, subtle increases.” He does expect prices to continue to rise as refineries transition to more expensive summer-blend fuel.

“We think gasoline will be modestly more expensive than last year,” said Kloza. However, a major hurricane strike on the nation’s refining infrastructure—such as 2017’s Hurricane Harvey—would change this forecast.

“Gasoline is essentially the dog that hasn’t barked.”

“Within the context of a week, it knocked out 25% of U.S. east of Rockies’ refining capacity,” Kloza said. “It’s unprecedented and hopefully just really bad luck.”

Examined from a multiyear perspective, fuel costs have increasingly been less of an economic burden on consumers. From 2011 to 2014, consumers paid $1.89 trillion for gasoline. In the next four-year period, from 2015 to 2018 (assuming a projected average 2018 price of $2.56 per gallon), they will have spent $1.33 trillion. Even assuming Congress passes a 23-cent-per-gallon increase on the federal gasoline tax in 2018, consumers would still save around a half-trillion dollars in the most recent four-year period.

“If you wonder why c-stores have had a good environment, that’s pretty much it,” he said. “Think about all of that extra disposable income.”

The biggest anticipated factor that could shape the fuel outlook for 2018 is exports. Since the export ban was lifted in 2015, the United States has been shipping record volumes of finished motor fuel, much of it to Central and South America.

“We’ve had a number of weeks where we’ve exported 1 million barrels per day of gasoline or more,” said Kloza. This is butting up against domestic demand, which has averaged out at 9.3 million barrels per day (bpd) and is projected to average 9.8 million bpd during the summer.

“You’re exporting 1 million—you’re finding a home for a lot more gasoline than you’re manufacturing,” he said. As exports grow, this can pressure domestic supply and, in turn, U.S. gasoline prices.

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