OPEC Is Cutting Back, U.S. Refiners Aren't

No sizable pump price cuts likely in near future
Photograph: Shutterstock

CAMARILLO, Calif. — The national average retail regular-grade gasoline price shed 1.22 cents in the past two weeks, putting it at $2.6478, according to the most recent Lundberg Survey of U.S. fuel markets. The past four weeks brought a drop of 3.92 cents.

It doesn't seem likely that this will be followed soon by sizable pump price cutting. In fact, U.S. average changes may be quite small in either direction, or nil.

One the one hand, crude-oil prices, the dominating factor in the price of gasoline and its directional moves, are up. Two price events for West Texas Intermediate (WTI) last week: the strong market response to a large inventory reduction, followed two days later by a much more muted response to the agreement by "OPEC plus"—the Organization for the Petroleum Exporting Countries (OPEC) and nonmember states—to further curtail oil output during 2020's first quarter.

In addition to recent oil price gains, pressure on gasoline prices may emanate from seriously reduced refiner margin on gasoline, caused by the market re-entry of capacity that had been idled for repairs and maintenance while gasoline demand is in its normal winter hibernation.

Refineries that had much capacity idled are in sore need of sales, and those that suffered less capacity on the sidelines must fight for theirs too, bringing on deep wholesale gasoline price cutting. The U.S. capacity utilization rate has now shot up to nearly 92%. Gasoline inventories are swelling just as WTI stocks took a big hit. The result has been an ugly squeeze on U.S. refiners' gasoline margins, so the current pressure to recover margin is acute.

Retailers, though, gained margin on average, a 6.47-cents-per-gallon (CPG) improvement since Nov. 22, as rack and dealer tank wagon (DTW) prices have been sliding.

The current U.S. average retail margin is 27.91 CPG, the best it has been since early August. Unarguably, however, that better margin on Dec. 6 is not wonderful. And it may be tough to hang onto this current 28 cents if and when refiners move fiercely into wholesale price increase mode, what with both downstream sectors coping with the low gasoline demand season. The fact that the current average retail price premium over its year-ago point exceeds 14 CPG, disincentivizing motorists, doesn't help.

As always, gasoline supply-demand conditions vary around the country, with glut-making changes in some areas and supply normalization after shortage in others. In Salt Lake City, our Dec. 6 snapshot reveals an eye-popping 92.7 cents of retail margin, expanding wildly by nearly 66 cents as the weighted average wholesale price crashed 73 cents but the retail price dipped by one-tenth of that. The average California retail price is down nearly 35 cents in the past month; in the past two months, the Los Angeles spot price has retreated by $1.05 per gallon; and the high retail price market San Diego, at $3.7406 for regular, got a weighted average wholesale price break of 14.14 cents, pump price slippage of 13.66 cents and margin improvement of a small 0.85 CPG.

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.

Trilby Lundberg is publisher of the Lundberg Survey of U.S. fuel markets.


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