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OPINIONFuels

Crude Oil, Refining Cutbacks and Now Spring Blend

Pump price jumps a dime—is more to come?
Photograph: Shutterstock

CAMARILLO, Calif. — Since Jan. 11, when pump prices hit bottom after a months-long crash, the national average retail price of regular-grade gasoline has climbed 13.02 cents per gallon (CPG), according to the most recent Lundberg Survey of U.S. fuel markets. The U.S. benchmark grade of crude oil rose 13.5 CPG equivalent during the same six weeks.

In the two weeks ending Feb. 22, the average retail price jumped 10.13 cents. Oil moved up 10.81 CPG.

Powerful factors in oil's price rise—including the Organization of the Petroleum Exporting Countries’ (OPEC) output reduction and depressed oil volumes from two distressed members, Iran and Venezuela—aren't likely to go away soon. The global supply hit from those is only partially offset by record oil production in the U.S.

Clearly, on average retail gasoline prices are keeping up closely with crude. But now the U.S. gasoline market has seasonal dynamics of its own affecting price: About 14% of national refining capacity is offline due to maintenance projects, most of them planned, which is tightening gasoline supply. At the same time, federal vapor pressure rules are rolling out over coming weeks, adding to cost. We may well see another dime in price at the pumps on average, even if oil prices do not climb higher.

Spring/summer blend cost hits come mostly on May 1 for the wholesale market and June 1 for the retail market, and earlier in some locales. The earliest is for a portion of Southern California: April 1 at street level. On an apparent basis, this has not increased California pump prices, which dropped 2 CPG in the past two weeks, but the higher costs of anti-smog regulations won't be sparing any gallon in the country. If oil prices retreat, we may not see the lower vapor pressures increasing retail prices, but they will still be inside prices.

Meanwhile, if oil prices continue to climb, pump price boosts in coming weeks would include that and more.

Further, there remains stark gasoline margin pressure in the U.S. downstream. Refiners did manage a narrow slice of recovery for themselves in the past two weeks, in large part from idling some capacity—amounting to about 14% of the nation's total—during equipment repairs; however, on gallons not sold, a higher margin is moot. And refinery gasoline margin remains puny, far lower than during the past several years.

As for retailers, regular-grade margin sat barely over 15 CPG on Feb. 22, losing close to a nickel over the past two weeks, especially with Feb. 22's dramatic rack price increases in much of the nation.

Gulf Coast regional average jobber buying prices have leaped nearly 18 cents since Feb. 8, and 7.26 CPG on Feb. 22 alone. In refining center Houston, retail margin is barely breathing. In the two weeks ending Feb. 8, the average wholesale price of regular, weighted by class of trade, rose 2.37 CPG, but the retail price in this market dropped 3.1 cents. This was followed by a failure of retail price to keep up with wholesale's rise, with wholesale climbing 18.93 CPG by Feb. 22 but retail rising just 14.05 cents. So in Houston in that day's Lundberg snapshot, regular-grade margin, which has to cover so many fixed and variable costs of doing retail business, is an alarmingly low 1.47 CPG.

February brings a nice increase in demand after the trough month, January.

But inclement weather has pent up some of the normal seasonal gasoline demand growth, and its release will be warming for retailers. It helps that the current average pump price is a 15-cent discount to its year-ago point. But because retail prices are likely to continue climbing, moderately or more dramatically depending upon crude oil's price path, retailers will be under heavy competitive pressure to chase gasoline sales even as spring and summer driving patterns kick in.

Camarillo, Calif.-based Lundberg Survey Inc. is an independent market research company specializing in the U.S. petroleum marketing and related industries.

Click here for previous Lundberg Survey reports in CSP Daily News.

 

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