Expect Gasoline Prices to Increase into Spring, Maybe Summer

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

By Brian Milne

In the wholesale gasoline spot market in southern California, trading moved to the low summer-grade Reid vapor pressure rating on the last day of January, well ahead of the rest of the country, with RVP measuring the release of volatile organic compounds into the atmosphere. The higher the ambient temperature, the greater the release of these emissions, which is why RVP ratings are lowest during the summer months.

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Sunny southern California will remain at the summer-grade RVP through late October, although the region is an outlier, with most of the country transitioning to low RVP ratings at the bulk wholesale level in March and April. Suppliers must have summer-grade gasoline at retail outlets no later than June 1, although in southern California the deadline is April 1 and a month later on May 1 in northern California.

These are important dates for anyone in the business regardless of where you sit on the supply chain, as the transition to lower rated RVP gasoline affects operations at refineries, terminals, and in the back office amid the supply rotation. The transition is also a key factor in why gasoline prices increase from winter to spring historically, although not the only reason.

Firstly, it costs more to produce the summer specific gasoline blend, which takes longer to manufacture because of the extra processing required to reduce harmful emissions that also diminishes the yield from a barrel of crude. Refining costs can run 5 cents to 15 cents per gallon more for the summer grade blend compared with winter quality product.

During late winter ahead of this transition, refineries move into seasonal maintenance known as turnarounds, which are carefully planned periods of extended maintenance that can last a month or more. Refiners stagger turnarounds, which can take up to two years to schedule. Maintenance conducted during this period can also be less extensive and for shorter durations.

The first quarter is chosen for this maintenance to help refiners prepare for the transition to summer gasoline blends. It’s also a time when gasoline demand is lowest. Still, refinery downtime can boost gasoline prices since there’s less production.

The winter-to-summer blend down for gasoline can also cause price swings, especially if suppliers need to drop prices to flush out winter-grade product only to hike them again when summer specified gasoline is stocked. These at times swift price swings are mostly realized at the wholesale level, and more gradually passed through to retail.

As this transition occurs, gasoline demand usually begins marching higher from typically lower consumption levels in January and early February, amid the winter thaw. Gasoline demand peaks during the summer months, with the summer driving season running from Memorial Day in late spring to Labor Day. Greater demand typically means higher prices.

Another dynamic at play is that this seasonal trend is well known in the trading community. Frequently, those speculating in the gasoline market get ahead of the seasonal uplift in prices, and buy futures contracts. Climbing futures prices can amplify the seasonal increase in gasoline values in physical markets.

At more than 50%, crude acquisition costs make up most of the price of gasoline, with crude oil traded globally. Supply disruptions which can be caused by a myriad of issues can push those costs higher, which would, in turn, lift the price of gasoline.

In the current market, several factors have merged to goose-step crude prices to better-than three-year highs, including a pipeline issue in the North Sea in early January, affecting the international Brent crude price, and an ongoing issue at a pipeline from Canada to the United States, that has underpinned an advance in West Texas Intermediate, the U.S. oil price benchmark.

Periods of extreme cold weather also drove up demand for heating fuels that boosted crude prices, while the geopolitical landscape has turned more violent. Street protests in Iran, war in the Middle East, on and off militant attacks in Nigeria and Libya, and an economic and humanitarian collapse in Venezuela all threaten oil supply, with all of those countries members of the Organization of the Petroleum Exporting Countries.

A primary factor in pushing up crude prices in January has, however, been expectations for strong economic growth globally, including the United States. Growing economies use more oil, underpinning higher prices.

In the United States, gasoline demand accounts for about 40% to 45% of total demand for oil products. So, expectations for a strengthening economy translate to an outlook for higher oil demand met largely by an increase in gasoline consumption. A healthy employment picture ties into greater demand for gasoline, and the U.S. unemployment rate is sitting at a 4.1% 17-year low. Consumer sentiment is also very strong, increasing in January, with a confident consumer typically driving and spending more.

In early 2018, these underlying features joined with speculation that prices would move higher to push retail gasoline prices up to multi-month highs in January. In fact, there were only three weeks in 2017 in which retail gasoline prices in the United States were higher than where they ended January, and those weeks were in September when Hurricane Harvey had caused widespread supply disruptions after slamming into the heart of the U.S. refining complex in Houston.

Speculators have amassed the largest net-long position in gasoline futures in a year, with a long position taken on the belief that prices would move higher. This can overheat the market and spark a sharp selloff, many times triggered by less-than-expected demand rates due to high prices at the pump. This year however, gasoline prices will likely “correct” lower before again climbing to multiyear highs in late spring.

Brian Milne is the energy editor with DTN, an independent, trusted source of actionable insights for 600,000 customers focused on feeding, protecting, and fueling the world. Customer-centric and employee-driven, DTN focuses on empowering agriculture, oil and gas, trading, and weather-sensitive industries through continuous, leading-edge innovation. DTN is based in Minneapolis, with offices globally.