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OPINIONFuels

OPEC Cuts, Retailers Regain Margin

Gasoline price crash continues
Photograph: Shutterstock

CAMARILLO, Calif. -- Crude-oil producers continue to deliver gifts to motorists, but not without sacrifice. Yet the latest oil price declines may mean more price-cut goodies at the retail pump.

On Dec. 21, the U.S. average retail regular-grade gasoline price was $2.4261, down 8.06 cents per gallon since Dec. 7, according to the most recent Lundberg Survey of U.S. fuel markets.

The price crash is now 11 weeks old, totaling an impressive 54.38 cents. The principal cause since Oct. 5 is lower crude oil prices. The price of West Texas Intermediate, for example, has dropped by nearly $32 since its early October high, and the current price of $45.59 per barrel is six big bucks below what it was a day before OPEC announced its Jan. 1 price support action by producing less. WTI's price moved up very modestly with the OPEC news, but one beat later it shrugged it off and fell some more.

On top of lower oil prices, there was a bit of added gasoline price-cutting impetus from very generous U.S. gasoline supply during a time of meager to zero demand growth. January is nearly here, and it is the lowest gasoline demand month of the year. But refiners are again using more than 95% of total U.S. capacity. Supplies are more than sufficient. Demand, perhaps now waking from torpor due to the recent pump price plummet—it helps that the retail price is now 8.5 cents below its year-ago point—has been weak all year.

In the latest two-week period, the near month futures market prices of benchmark light grade crude oils declined more than twice as much as U.S. retail gasoline did. A strong possible implication of this is more gasoline price cutting. Without a significant change or perceived change in the world oil supply/demand balance in favor of an oil price increase, further price erosion at the pump is likely.

Oil price changes and retail gasoline price changes never marching precisely together—as they are impacted continuously by downstream margin conditions—are among other factors. Both refiner and retailer margin on gasoline have risen somewhat since Dec. 7. Refiner margin recovery was meek in light of long-term deprivation, while retailer margin recovery was returning to a celebratory high seen the prior month. In each of the two sectors, gasoline margin improvement was 4.8 CPG.

But refiners are in ugly margin territory on gasoline, thanking their lucky stars for far better economics with distillates that they continue to churn out in a frenzy, thereby necessarily adding to already fat gasoline supply. Meanwhile, retailers are achieving their second-highest margin in this months-long higher margin chapter, 37.36 CPG on regular. There is a hefty handful of markets with retail margin currently well above 50 cents, typically in the West but also in Boston, Atlanta and Denver.

Nationally, the all-grades-pooled retail margin on Dec. 21 was a festive 39.23 CPG.

If from here crude oil prices don't climb back up, there may well be several cents-per-gallon equivalent from the latest oil price reductions available to migrate into refiner gasoline margin and into wholesale prices to refiners' accounts. If this proves the case, and U.S. refiners do in fact soon regain gasoline margin significantly, but retailers lose a few cents, then the final gift recipients from lower oil prices will be consumers. Motorists would receive perhaps a nickel's worth of additional price reduction if those conditions ensue. But it could be more, much more.

Trilby Lundberg is publisher of the Lundberg Survey Inc., a Camarillo, Calif.-based independent market research company specializing in the U.S. petroleum marketing and related industries. Click here for previous Lundberg Survey reports inCSP Daily News.

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