March and April 2019 were challenging months for California gasoline prices, with retail prices cresting $4/gal.
OPIS’ Lisa Street and Bridget Hunsucker take you inside the West Coast gasoline rally from two different – albeit related – perspectives. Lisa focuses on how refinery downtime lead to gasoline supply shortages and Bridget ties in rising carbon compliance costs, both of which helped push prices higher.
Watch Lisa and Bridget explain it all, then read below for more detail:
Perspective 1: U.S. Refineries and Incremental Gasoline Supply
Unit downtime at refineries on the West Coast pulled barrels out of the spot market and resulted in a big dent in regional gasoline supply.
Two refineries were engaged in planned turnaround activity at the same time.
But wait! Don't refiners usually prepare for their planned maintenance by going out and buying up the supply they're going to need before they start? And then, if there's any sort of delay in their schedules, can’t they go back to the spot market and buy more supplies?
In a perfect world, yes. Refineries typically stock up ahead of their planned turnaround.
But what they can't plan for is when other refineries in the region have unexpected issues. This spring on the West Coast, four other refineries had unexpected issues on their refinery units. That pulls “incremental barrels” out of the spot market and further tightens that supply chain.
Bottom line: Short supply facilitated a West Coast price rally that culminated in gasoline pump prices stretching past $4/gal.
What’s Next for California's Gasoline Supply?
California drivers are going to start to see some relief soon, as supplies come back into the market.
Refinery issues are resolving and that’s going to bring barrels back into the mix. Additionally, a lot of fuel has been imported from the Far East to make up for the spring shortfall.
A steady stream of cargos plus production coming back online equals very bearish fundamentals for prices headed into the pre-Memorial Day timeframe.
In the California gasoline spot market, where bulk barrels are traded, OPIS editors saw prices decline some 20 cents in a single day in San Francisco and Los Angeles alike – all in response to news about refinery production coming back online.
But we don't know how quickly high prices will recede along the supply chain. That’s because prices are prone to decrease at a slower pace than the feverish clip they tend to take during a rally.
Perspective 2: Clean Air Initiatives and Rising Carbon Credit Prices
This spring, while California gasoline prices were rallying, the price of California carbon allowance credits also soared.
Backstory: California requires big carbon emitters – like refiners – to either cut their emissions or go out and, essentially, pay for the right to pollute by buying California carbon allowances, or CCAs.
California also has a program called the Low Carbon Fuel Standard, or LCFS, which also requires the purchase of allowances from heavy emitters.
Both programs lead to added costs to the price of a gallon of fuel in California.
Bottom line: This spring, at the height of the rally in the CCA market, some 32cts/gal was tacked on to the price of gasoline at the wholesale rack level to accommodate for cap-and-trade and LCFS costs.
Watch this video to see how cap and trade works at the rack:
What’s Next for California Carbon Credits?
Just as was seen in the California gasoline spot market, the hot pace of the CCA market has abated in mid-May.
Carbon credits have backed off to the tune of about a dollar, which means less to be passed along by producers.
That stands to bring some relief to prices at the wholesale fuel rack, where carbon offset prices are often factored in.
What Can California Gas Buyers Expect Ahead of Memorial Day?
California gas prices have already started to come off a little bit at the retail pump, though fuel prices are still over $4 a gallon.
A move toward lower prices does stand to butt up against seasonal demand trends: Gas prices usually peak for the nation around Memorial Day.
However, after that Memorial Day peak, U.S. gasoline tends to begin a gradual decline in price.
But, ever the renegade, California is known to shake off that typical price structure. And if there are lingering supply concerns, the Golden State may again break the mold.
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