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California Gasoline Prices Set for a Volatile Decade

Posted by OPIS Staff Report on Jan 13, 2020 8:00:00 AM

Unpredictability and dramatic price movements characterized California gasoline prices in 2019. What is the state of Los Angeles and San Francisco gas prices in 2020 and what factors may affect them?

Two separate, sharp spikes that spanned several weeks placed L.A. and San Francisco cash differentials to NYMEX futures and California gasoline price averages at multiyear highs.

Here’s a video explaining what happened to motivate one of the 2019 California gasoline price spikes:

 

In 2019:

  • NYMEX cash differentials for L.A. CARBOB spanned a range of over $1.35/gal throughout the year, from a low discount of around 8cts/gal in June, to a peak just above a $1.27/gal premium to futures prices in October.
  • That was more than double the spread between the high and low cash differentials seen in 2018, which was 65.5cts/gal.

West Coast market players say they are keeping their seatbelts fastened for 2020, with the factors that motivated 2019 market volatility still very much in play in the gasoline forecast for next decade.

West Coast Refinery Status Is Uncertain

The primary underpinning of 2019’s prolonged gasoline price spikes – one in the spring and another in the fall – were tied to planned and unplanned regional refinery outages piling up at the same time.

The West Coast is particularly sensitive to refinery issues compared to other U.S. regions, based on California's unique fuel specification requirements and its geographical isolation from other U.S. oil and gas infrastructure. Both factors dramatically decrease available resupply in times where regional production levels are hampered.

In terms of West Coast 2020 Q1 planned work, the docket appears fairly light, sources told OPIS. However unplanned shutdowns are always the wild card.

In early 2019, for instance, Valero's Benicia refinery, in Northern California, was offline for over a month following unexpected issues involving a coker and flue gas scrubber, and at one point in the spring, seven of the state's 10 major refineries were experiencing some type of maintenance.

In addition to the usual refiner hiccups, several traders expressed increasing concern about the impact of power outages amid California's "unreliable" power grid following PG&E's recent high-profile bankruptcy and service disruptions.

"I think reliable power supply will remain one of the main challenges in California," one trader told OPIS.

As a means of wildfire prevention, the utility company initiated several "Public Safety Power Shutoffs" in California in the fall of 2019, although no refinery impacts were reported due to the planned outages.

The company's website says it anticipates that the shutoffs could occur "several times a year" in its service area, although when, where and exactly how often are impossible to predict, as the decision to shut off power is due to environmental conditions with greater wildfire potential.

Impact of Electric Vehicles on California Gasoline Prices and Demand

West Coast gasoline demand is also a hot topic of discussion as the new decade looms, with a lot centered around the impact of electric vehicles and renewable fuels.

California has a goal to reach 5 million electric vehicles on the road by 2030, and comprises roughly half of the total EVs in the U.S.

However, while the state has several pieces of legislation setting adoption level targets designed to bolster EV use, their percentage of total vehicles in the state is still small, with just over 655,000 EVs on the road in early October 2019, according to Veloz, a nonprofit promoting EV use in the state.

Still, even though new car registrations for light-duty vehicles (cars, pickup trucks and SUVs) in California were down 5.1% in the first nine months of 2019, combined market share for electric vehicles was up slightly year on year at 7.9%, according to IHS Markit, the parent company of OPIS.

The share of electric vehicle registrations in the state was at 5.5% on the year after the third quarter, up from 4.7% in 2018 and 2.6% in 2017.

Traders expressed multiple opinions of the impact of EVs to gasoline demand, with some shrugging off EV growth as too slow to dent demand much and others keeping a close eye on it. Even in combustion engine vehicles, increased fuel efficiency has the potential to lighten demand as well, one trader pointed out.

What About California Diesel Prices?

While the impact of electric vehicles is part of the broad picture on gasoline demand, renewable diesel is at the forefront of the West Coast diesel discussion.

"We're going to consume the fewest gallons of natural CARB diesel this year, and that number will continue to shrink until it's all replaced by renewable diesel," said a West Coast participant. "The more that happens, the more we'll export our diesel and import renewable diesel."

West Coast Gasoline Import/Export Flows

If demand does take a hit, the west coast of Mexico remains a relief valve for excess barrels, particularly with repeated production issues and outages at the country's Salina Cruz refinery, but competition from other import sources into Mexico, including Asia, continues to tighten, according to Energy Information Administration (EIA) analyst Mason Hamilton.

"It will be interesting to watch going into 2020 the competition between PADD 5 refiners when everything is working fine versus refineries in Europe and Asia competing to supply the Mexican market as well as competition from the Gulf Coast," Hamilton said.

"The infrastructure is not really there on the eastern coast of Mexico to transfer products from the Gulf Coast to the western part of Mexico."

Listen to an OPIS Crash Course podcast on the state of the Mexican gasoline market:

A PADD3 (U.S Gulf Coast) barrel would have to go through the Panama Canal or around South America so there's an ingrained transportation cost from the Gulf Coast, but the cost of production for PADD5 refiners is inherently more expensive, Hamilton added.

Hamilton noted that the West Coast went from net exporter of gasoline in 2018, but in the first three quarters of 2019 was a net importer to the tune of 17,000 b/d.

Lessening Spot Trade Liquidity as the West Coast Trader Pool Thins

While volatility and the potential to capture favorable arbitrages during times of high prices could attract traders to the West Coast, that didn't appear to be the case in 2019, and in fact, a number of high-profile trade personnel exited the spot market.

The thinning of the trader pool on the West Coast is for "good reason," said one veteran market participant. You have to be "good, and lucky," he said, noting that while a trader could make a technically "right" call in the marketplace, the fickle nature of the market can quickly turn a profitable position on its head.

Additionally, sources pointed out two major company transitions that appear to have pared down spot market liquidity, along with the number of traders, as of late.

Marathon's acquisition of Andeavor (formerly Tesoro) has cut back the company's participation in the spot market, with Marathon focusing more on "inventory management" rather than spot market trade, one long-time market participant said.

Additionally, IPC, another once-active spot market participant, closed its trading arm on the West Coast after the company's purchase by TAC Energy.

Further consolidation was seen on the West with PBF's purchase of Shell's Martinez refinery, the sale of which is expected to close in Q1 2020, although Shell is expected to retain some presence in the spot market due to its Carson, Calif., fuel terminal.

PBF currently owns the Torrance refinery, which it purchased from ExxonMobil in 2016.

Sources noted that stringent environmental regulations, including the state's cap-and-trade and LCFS programs, may be driving out some market players as well, particularly those who only own a single asset in the state.

"It's tough to do business out here with all the regulations," one participant said. "For refiners, they have hundreds of billions of dollars of investments in other countries and the return on capital in emerging markets is much greater than nine-figure lawsuits. It's a very risky state to be in if you have deep pockets and I think everyone sees that and folks are moving away."

Don't miss a price move or a clear explanation for market volatility in 2020. Find out more about the OPIS West Coast Spot Market Report.

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Tags: Gas & Diesel, California

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