What's Up With Retail Gasoline Margin?

Oil price crash's effect on downstreamers
Photograph: Shutterstock

CAMARILLO, Calif. -- The Nov. 16 U.S. average regular-grade retail price is $2.7228, down 12.34 cents per gallon (CPG) from two weeks ago, down 24.71 cents from six weeks ago, and the lowest pump price since March 23 this year, according to the most recent Lundberg Survey of U.S. fuel markets.

U.S. average retail gasoline margin on regular is now 40.83 CPG, up 6.42 cents since Nov. 2, up 23.12 CPG from eight weeks ago, and at its highest level since, well, ever. Retail margin has shattered its all-time-record high, which was 35.6 cents back in mid-August 2015.

The steep oil price decline, with West Texas Intermediate (WTI), for example, down $20 per barrel since the start of October, is the essential cause of lower product prices, joined in small part by the currently very weak U.S. gasoline demand growth rate.

There is no big factor suggesting an immediate change in abundant global and U.S. supply of either crude or gasoline. It seems likely that U.S. refiners will continue to access attractively low oil prices, at least short term. But sometime before long, they won't be likely to keep sacrificing margin for the sake of chasing sales. U.S. refiner margin on gasoline was already very narrow, and now it has skinnied further as wholesale price cutting again exceeded the oil price cuts refiners got.

Retailers, in no festive place thanks to virtually halted gasoline demand growth, have been pocketing large portions of their wholesale price cuts, and handing over the rest to motorists. We note that retail margin is not profit, and the fixed and variable costs that must come out of retail margin have been growing, not shrinking, so it takes more and more pennies to make a decent margin in 2018 than in years past.

Still, the new record margin of nearly 41 CPG is a dramatic change. Current margin is about twice the width of margin during full calendar year 2017, when it averaged an excellent 19 cents.

But the public at large, especially officials, politicians and voices unfriendly to gasoline, do not routinely thank retailers for hanging in there during low price times, while they do routinely complain—even investigate—them when prices are shooting up. If during high prices gasoline margin is meager, no comment from the price-policing folks; but if margin is found to be “fat and happy,” they yowl about price gouging.

So current conditions are safe and good from a gasoline retailing PR point of view, because prices have been falling at the same time that margin has been rising. Unfortunately, this convenient combination masks an ongoing problem: disapproval of gasoline as a business that merits a quest for good profit. Gasoline industry critics are not busy congratulating retailers for current margin width, although retailers deserve it.

At the moment, wholesale price increases may await gasoline retailers as refiners are forced to cut back gasoline production. U.S. refining has returned to above 90% utilization of capacity, despite inferior gasoline margin on a barrel of crude. But without an upswing in gasoline demand, it seems unlikely to stay that high. Lack of demand growth threatens the whole of the downstream. So when retailers get wholesale price hikes, they will be hard pressed to pass them through to the street. Instead, those now enjoying very wide margins may have to slim them down.

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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