Why is Gasoline in California so Cheap?
An energy analyst friend of mine from the East Coast called and asked me why gasoline prices are so cheap in California. This is a question I have been puzzling over all summer.
Of course, most readers are going to say, “What are you talking about? Retail gas prices in LA are around $3.75. That’s not cheap!”
Retail prices have been extremely high, peaking at nearly $4.30 per gallon back in May, according to the EIA. But my friend wasn’t calling about retail prices; she wanted to talk about the spot market.
The spot market is the first point in the supply chain where gasoline is sold. A spot sale is typically for a large volume, twenty five thousand barrels or 1.1 million gallons, delivered from a refinery into the common carrier pipeline on a negotiated date. The spot market reflects the supply and demand of gasoline at the refining level.
Spot deals are often expressed in prices relative to gasoline on the New York Mercantile Exchange, aka “the Merc” or “the screen”. Prices on the Merc reflect the market for gasoline in New York Harbor and are a function of supply and demand for crude oil and products worldwide. Oil prices (and gasoline on the Merc) were high due to a number of factors, including the war in Libya, strong demand in Asia, and the weak dollar.
In the summer, Los Angeles spot gasoline normally trades well over the screen because regional demand is greater than local refining capacity. Market participants have to bring gasoline into LA from distant markets in order to meet demand. If supply is interrupted by an unscheduled refinery outage, spot prices can spike as suppliers scramble to find supplies to meet their commitments.
In July of 2010, the LA spot market traded in normal ranges of 20-25 cents per gallon (cpg) over the Merc, according to OPIS. This differential (diff) to the Merc reflected the cost to bring additional tanker loads of gasoline from the US Gulf Coast, Europe, or Asia.
During most of this July, the LA spot market traded 15-20 cpg under the Merc. Something is driving the diff in spot prices in LA to be 35-45 cpg under “normal”.
In order to explain the weird diff, my friend and I looked at the components of supply and demand. On the supply side, we could see that refineries were running at about 85% of capacity, but according to California Energy Commission data*, the refineries were in a max distillate mode. This indicates that local refiners are running their gasoline-making equipment at low levels, probably near minimum turndown. They couldn’t make any less gasoline without shutting down.
Another component of supply is imported barrels. The traders say the arbitrage to the West Coast from Asia is closed and they cannot afford to bring tankers in.
On the demand side, we are hearing that refiners with their own American flag tankers loaded ships on the West Coast and took gasoline back to the Gulf Coast. With LA gasoline at around 40 cpg under the screen, this move makes money. We expect there have been gasoline exports as well, given the low spot price.
Another change in demand has been the start of summer time ethanol blending in the Phoenix area. This displaces about ten thousand barrels per day of gasoline supply.
The one component of demand that is hard to see clearly is retail demand. California’s Board of Equalization tracks taxable sales of gasoline but these data are slow to be reported. The last report was for April, which showed retail sales for April off about 1% versus April of 2010.
We wonder if the bad economy in California, combined with “four buck gas” in May, caused retail demand to tank. The volume could be as high as fifty thousand barrels per day or roughly 7% of gasoline demand. This large drop could account for “cheap gas” in the LA spot market.
*Stillwater Associates has been tracking and analyzing CEC Weekly Fuels Watch Data since 1992. Take a look at a sample of our Refinery Production and Inventory Comparison from the week of August 5, 2011. If you are interested in a weekly subscription of this analysis please contact us.
Categories: Wisdom from the Downstream Wizard