ROSEMONT, Ill. -- Change is a reliable norm in the fuel business, and by that measure, 2017 will not disappoint.
Tom Kloza, global head of energy analysis for Oil Price Information Service (OPIS), Gaithersburg, Md., shared expectations for the oil and fuel markets over the short and long term during his keynote at the recent 2017 NACS State of the Industry Summit.
From crude to RINs, here are four predictions for 2017 ...
1. Crude oil
Crude oil will not hit $100—let alone $70, Kloza said.
“It’s not going to happen. It shouldn’t happen. There are tremendous odds against it happening,” he said.
Even $60 crude is “a real push” for 2017, said Kloza. Bullish factors such as the production-cut deal by the Organization of the Petroleum Exporting Countries (OPEC) have pressured oil prices. Assuming the deal is extended through 2017—which Kloza expects—oil prices could drift between $50 and $60, according to OPIS projections. As of April 14, the price for West Texas Intermediate (WTI) was just above $53 per barrel.
What is preventing higher prices? Several new, multimillion-dollar production projects are finally poised to come online, after being commissioned during a much higher oil-price environment. These projects typically take seven years to come to market. Meanwhile, more U.S. shale projects are starting; it typically takes about only seven months for oil from these projects to come to market. It’s a dynamic that Kloza calls the “seven and seven problem.”
“It’s a really, really a difficult proposition for crude-oil prices to get beyond that seven and seven,” he said.
2. Gasoline demand
Gasoline demand will not hit 2016’s heights.
The past year “will go down in history as the year that more gasoline was sold in the United States than in any previous year or any subsequent year,” said Kloza.
This year is already showing a smaller appetite for gasoline. According to OPIS figures, demand was off 1.6% for 2017 year to date. (Government figures show a steeper 5% decline.)
Higher gasoline prices relative to this same time last year are one reason 2017 won’t likely best 2016 demand, Kloza said. “There were a lot of states in January and February where people were paying 15 to 16 cents per gallon (CPG) more than in January and February 2016. That has an impact,” he said. The Energy Information Administration (EIA) in its most recent Short-Term Energy Outlook projected a 2017 retail average of $2.39 per gallon, which would add $200 to consumers’ fuel costs in 2017 vs. 2016.
Over the longer term, structural factors such as the Corporate Average Fuel Economy (CAFE) standards will weigh on demand as the U.S. vehicle fleet turns over, even if the Trump administration relaxes the targets. The EIA is projecting a nearly 23% decline in gasoline demand from 2016 to 2035.
“We’ve been wrong before, but those are pretty scary numbers,” said Kloza. “There are going to be a lot of small retailers who will not make it and be on hospice care, and having an alternative profit center, or foodservice program, is very, very important.”
3. Retail fuel margins
Retail fuel margins in 2017 will disappoint.
The fuel-margin environment has been tough for the first few months of 2017, as most fuel retailers can attest. According to OPIS figures, margins were off more than 15% on Jan. 1 and Feb. 1, 2017, compared to the same dates a year ago, although March 1, 2017, margins were up more than 4% compared to March 2016. But a spike in wholesale prices in later March is likely to challenge the quarter’s final performance figures.
On a regional basis, the margin declines were steepest in the West, Southwest and Southeast in January and February. Most regions saw margin growth in the first half of March, but that late cost increase will erase some of those gains once data for those first 100 days of 2017 comes in.
“The good thing is, I think it will get better; this is not a long-term trend,” said Kloza. “But if you’ve had a tough 2017 so far, the numbers say we weren’t just whining uncontrollably; the numbers support the issue.”
4. Point of obligation
The point of obligation won’t change.
Despite reports that the Environmental Protection Agency (EPA) under the Trump administration is considering redefining the point of obligation from refiners to large retailers to meet ethanol-blending goals in the Renewable Fuel Standard (RFS), do not expect it to happen in 2017, Kloza said. Some refiners had petitioned the EPA to move the point of obligation downstream, and they now have an ally advising the president in Carl Icahn, a majority owner in CVR Refining.
“It could happen in terms of a proposal next year, but there will be lawyers that bill bounties of money as this thing rages,” said Kloza. “EPA rulemaking cannot happen on a short-term duration, unless the president declares martial law.”
Meanwhile, prices for Renewable Identification Numbers (RINs), the credits that obligated parties such as refiners use to demonstrate compliance to RFS volume obligations, have been falling with the election of Trump and the appointment of Scott Pruitt, an RFS critic, to head the EPA. Large retailers such as Sheetz and Murphy USA earn RINs as they blend gasoline with ethanol, and they can sell them to obligated parties. This is partly what has encouraged some of them to add E15, the 15% ethanol blend, for the additional RIN value and the ability to add a few cents to their per-gallon profits.
But this advantage could shrink along with RIN prices.
“The price of the RIN is much, much more the lever that determines that a Sheetz can sell 89 octane in E15 for 7 cents under E10 and make money,” said Kloza. “It’s a much better lever than the ethanol price being 20 to 40 cents less than the gasoline price.”
Based on OPIS’ projections for $50 to $60 crude and excess refining capacity, “we don’t really see a return to where ethanol prices could be 60 cents, 80 cents or $1 under the price of gasoline.”