Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices
By Brian Milne
As we head toward the holiday season, gasoline prices in the U.S. are doing something they typically don’t do this time of year—advance. Several factors are driving the atypical price increase in early November that, as they say in trading lingo, has legs.
After a steady decline from early September through October, U.S. retail gasoline prices edged higher during the final full week of October, and are poised to continue the advance through the Thanksgiving Day holiday and into December. Some parts of the country, namely the greater Chicago area and California, will experience much sharper price gains owing to a pipeline leak and a new tax rate.
Seasonally, gasoline prices in the United States decline in the early half of the fourth quarter amid diminishing demand ahead of heavy holiday travel for the Thanksgiving Day and Christmas holidays while gasoline stocks build. Gasoline demand is weakest in January and February amid winter weather that restricts road travel.
This year however, supportive fundamental factors, higher crude costs and a bullish market psychology are all aligned to push retail gasoline prices higher for the next several weeks. The suggested price advance will also find support from a meeting by the Organization of the Petroleum Exporting Countries in Vienna on Nov. 30, when OPEC oil ministers and representatives from as many as 10 non-OPEC oil producers will gauge the success of 11 months of production cuts.
After erasing the price premium triggered by Hurricane Harvey’s assault on the Gulf Coast refining center in late August, early September, New York Mercantile Exchange RBOB (gasoline) futures rallied from early October into early November to test $1.80 gallon. For perspective, if you erase the price surge on the final day of August when Harvey caused a short squeeze price spike at the expiration of the September futures contract, NYMEX RBOB futures traded at a 27-month high on the spot continuation chart in early November.
Climbing crude costs explain much of the advance, with NYMEX West Texas Intermediate futures also rallying from early October spurred by a bullish market sentiment that a protracted three-year oversupplied global market was finally coming into a supply-demand balance. Internationally, oil inventories at key supply hubs and in floating storage have been trending down since June.
The market was slow to embrace the improving market disposition, pointing to still high inventory in the United States along with the belief that a price move by WTI futures over $50 bbl would spark accelerated drilling activity in the U.S. shale oil patch. While this remains a concern, shale oil producers have adopted a new discipline as investors sought a return on their investment that has slowed the upside ascent in U.S. oil production.
On the spot continuation chart, WTI futures in early November have rallied to the highest point since the first day of trading in 2017 on an intraday basis. This advance is driven by strong compliance by OPEC and 10 non-OPEC oil producing countries that have pledged to reduce their production by about 1.8 million bpd, which took effect on January 1 and runs through the end of the first quarter 2018. The 24 countries are expected to extend their supply pact for another nine months.
Compliance with their production agreement has been close to 90%, which is a surprise. OPEC has a checkered history in managing their supply agreements, with the strong compliance seen driven by Saudi Arabia.
Another unexpected development has been better-than-expected oil demand in 2017 globally and especially in the United States. The high rate of oil consumption along with the production cuts have prompted steep drawdowns, with analysts now expecting the global oil market to be tight in late 2018.
In the United States, gasoline stocks fell in late October to a 212.8 million bbl 26-month low and to a near match with the historical five-year average, according to data from the Energy Information Administration. EIA also shows gasoline supplied to the primary market up 257,000 bpd or 2.8% during the four weeks ended Oct. 27 versus the comparable year-ago period.
These data points are best reflected in days of forward supply, which has held below the five-year average since early September. Days of forward supply cover for gasoline are at their lowest point in more than two years, EIA data shows.
Tie these data points into a growing U.S. economy, above 3% growth for two consecutive quarters, expanding employment gains, the national unemployment rate is at a 4.1% nearly 17-year low, and a high level of consumer confidence that has reached a 17-year high, and gasoline consumption should continue to increase at a greater rate than usual in late 2017 into early 2018.
If you’re in Chicago, expect retail prices to scorch higher following a leak at a flange connection on the Explorer Pipeline that moves gasoline and diesel fuel from refineries in the Gulf Coast to the Midwest. The pipeline operator made a temporary repair at the flange on Oct. 24, but was forced to maintain a low flow rate on the pipeline until a permanent repair was completed in early November.
As a consequence of the reduced flow, the gasoline spot market in Chicago spiked to better-than two-year high at $2.2857 gallon on Nov. 1, with spot values receding in the two trading days that followed with the imminent return to normal flow rates on the pipeline. Retail prices in Chicago, which EIA reported at a $2.66 gallon seven-week high on Oct. 30, have much higher to go in the short term.
Lastly, if you fuel up in California, you are now paying the second highest gasoline tax in the country. The Golden State on November 1st imposed its new tax scheme that, when combined with the $0.184 gallon federal tax, pushes the state gasoline tax to the mid $0.70 gallon, one penny below Pennsylvania’s $0.777 gallon tax.
Consumers in California already pay some of the country’s highest gasoline prices because of environmentally stringent fuel requirements. On Oct. 30, EIA reports regular grade gasoline sold at retail outlets in the state averaged $3.066 gallon, with the price point above $3 gallon since mid-August.