Lowering the Bar in Oil’s Limbo Dance

Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

It was a chaotic start to 2016 for the oil market, with crude futures plumbing 12-year lows as turmoil in China’s stock exchanges and devaluation of its currency, the yuan, roiled equity markets worldwide, and oil traders sold off on worry over global demand growth. Gasoline, a bright spot for an otherwise dreary 2015 for many in the oil industry, was under heavy price pressure in starting the year following a huge build in inventory and plunge in demand.

Nationally, retail gasoline prices have slipped below the psychologically significant $2 gallon threshold, although you wouldn’t know it if you’re in California, where a parade of gasoline unit outages at regional refineries beginning last February with ExxonMobil’s Torrance refinery kept the market product short. Relief for the state’s drivers appears to be on the way, with gasoline inventory building.

In the primary wholesale market, basis values for CARBOB gasoline in the Los Angeles Basin plunged nearly 50cts gallon from summer-high levels from the last day of 2015 to the first week of 2016. Retail gasoline prices in LA ranged as high as $4.31 and as low as $2.46 gallon in 2015, according to the Energy Information Administration.

In the Chicago primary wholesale market, CBOB regular—conventional gasoline that requires 10% ethanol to be mixed into the blendstock to become finished gasoline, slid below $1 gallon in the opening days of 2016, down more than 20cts gallon from where they ended 2015. Chicago was another region that saw a wide range in retail prices in 2015 from $2 gallon to $3.37 gallon, EIA data shows.

Gasoline in the primary wholesale market trades in a basis or cash differential to the futures market on the New York Mercantile Exchange, with the RBOB contract sinking to a new seven-year low of $1.1135 gallon in 2016. The decline by gasoline futures came as domestic and international crude futures tumbled to 12 year lows, and are now on the verge of breaking below $30 bbl.

Forward visibility for the oil market is shrouded with uncertainty, although more pain for oil producers is widely expected in 2016. New supply in the global oil market is outpacing demand by one to two million bpd, with the EIA reporting total crude and oil products inventories in the United States at a record high. Moreover, Iran, a member of the Organization of the Petroleum Exporting Countries, stands ready to unleash another 500,000 bpd of oil into the market in the near term with the expected lifting of sanctions following a July 2015 agreement regarding its nuclear program.

OPEC doesn’t act like a cartel these days, abandoning its quota policy in November 2014. Instead of cutting production to boost oil prices when they’re low, OPEC’s 13 members (Indonesia recently rejoined OPEC) can produce what they want. This strategy was devised by Saudi Arabia in response to the US oil renaissance, with the unspoken goal to push high cost producers out of the market. OPEC ended 2015 with production at a three-year high, and that’s without the extra barrels from Iran.

Global and US oil prices could go even lower absent a sharp drop in world production, with $18 bbl mentioned. It’s not an outlandish forecast, especially when considering crude in Canada hit $20 bbl during the opening days of 2016.

Oil prices at these levels are problematic for a host of industries beyond oil drillers, with more than 100,000 jobs lost in the upstream oil exploration and production sector, and for regions of the country that produce this resource. Depressed oil prices limit investment in future production, sowing the seeds that grow supply shortages and price spikes.

The auto industry was a big winner in 2015, with low gasoline prices and interest rates and an improving employment picture converging to make it a record year for US vehicle sales. US automobile sales totaled 17.5 million last year, and pickup trucks and SUVs dominated overall transactions.

In the here and now, cheap gasoline is a welcome palliative in a world that looks far more dangerous and violent than it has in a long while. It’s a boon for US drivers, and a reason for fuel resellers to be optimistic in 2016.


Tags: ,