A Noisy Spring at the Gas Pump

Year-on-year analyses of fuel margin, supply and demand will be deafening
Photograph: Shutterstock

ROCKVILLE, Md. — The second quarter of any calendar year is always dynamic and often exciting. Through the years, April, May and June have delivered wild presummer highs for gasoline futures, as well as compelling drops from those overreactive heights.

Last year will hopefully stand as a pandemic outlier. But as the calendar rendezvous with second-quarter dates in 2020, it means that comp numbers will be lumpy, or perhaps even ludicrous for gasoline retailers and refiners.

Several gasoline executives pointed to the coming “noise” in early 2021 investor conference calls. To call the imminent year-on-year comparisons “noise” is akin to describing the Pacific Ocean as moist. Here are some important considerations to keep in mind as we move through anniversary dates with some of the most tumultuous months for human behavior and commercial operations in the fossil fuels era:

  • Year-on-year gasoline demand comparisons will be insane. From 2016 through 2019, second-quarter U.S. demand averaged 9.495 million barrel per day (bpd). Last year, the quarterly average dropped to 7.1 million bpd and it included some weeks with the lowest motor fuel consumption since the Kennedy administration. It’s reasonable to believe that second-quarter 2021 will handily beat last year’s numbers, but OPIS forecasts demand levels more typical of 2000 as opposed to 2016-2019.
  • Fuel margins can’t possibly match what we saw in spring 2020, when there was little incentive to cut prices to inspire additional patronage. OPIS MarginPro recorded its all-time high-water mark for gross fuel profits around April Fools’ Day last year at a whopping 95.5 cents per gallon (cpg). That margin corresponded to a period where sales were down by about half from 2019. The year-on-year margin comparisons will require rhetorical finesse when July brings second-quarter earnings conference calls from public retailers like Casey’s General Stores, Murphy USA, Couche-Tard and even big-box retailers BJ’s and Costco. Good luck in managing expectations or disappointment.
  • A new element in 2021 will help some retail bottom lines. Renewable identification numbers, or RINs, moved in renegade fashion back in 2013, with bulk retailers among the beneficiaries and merchant refiners qualifying as victims. Mostly radio silence prevailed for RINs from 2014 through 2020. Through the middle of March last year, ethanol RINs fetched an average price of 24.75 cents while biodiesel RINs averaged 44.75 cents. That same early period in 2021 has yielded an average ethanol RIN value of more than $1.06, representing a 428% increase year over year. Biodiesel RINs are up about threefold in the same period.
  • Fuel-blending economics can change drastically, but there has never been a greater incentive to market 87- or 88-octane midlevel ethanol blends.
  • Motor fuel price comparisons will also soon be off the charts. The second-quarter 2020 average price for unleaded regular was $1.99 pergallon, and the country commonly saw many sites pricing gas for less than $1.50 per gallon. With prices already pushing $3 in some markets in the first quarter, consumers will almost certainly see year-on-year gas price inflation of more than $1 per gallon in a number of states in second-quarter 2021. Whether that contributes to some demand erosion remains to be seen.
  • U.S. refiners will benefit from “easy comps,” but executives from that segment of industry can’t yet pound their chests. More than 500,000 bpd of U.S. refining capacity has been “rationalized,” which is corporate-speak for closed. Some other plants are being repurposed to manufacture renewable diesel. OPIS believes that more rationalization is yet to come.
  • The greatest unknown comes via questions as to how much pent-up demand or COVID cabin fever will contribute to increased travel and vacations when vaccines accomplish a flirtation with normal.
  • Finally, there is also the matter of whether commuting has forever been altered. Among huge companies, BP was the first out of the gate with a hybrid plan for some 26,000 office workers across the globe. The oil major will allow employees to work from home two days a week, with three sessions targeted for the commercial offices. Widespread adoption of similar or even more lenient standards might mean that the United States never returns to annual usage of 9 million bpd of motor fuel. We shall see.

Tom Kloza is global head of energy analysis for OPIS, an IHS Markit company. Contact him at Tom.Kloza@ihsmarkit.com.

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