U.S. gasoline prices in 2020 are expected to follow seasonal trends, but OPIS will keep an eye on supply and demand disruptions as were seen in 2019.
And new regulations for refiners, known as Tier 3, will also be a factor for U.S. average gasoline prices this year.
Here’s our region-by-region breakdown of the spot gasoline markets east of the Rocky Mountains -- the Gulf Coast, Northeast and Midwest -- independent from market shifts motivated by the coronavirus outbreak.
Remember, the price you pay for gasoline at the retail pump starts in the futures market, where paper contracts are traded. You can read more about gasoline price futures here.
Gasoline produced in a refinery is priced at a premium, or discount, to the futures market. That so-called spot price is then used to derive the value that wholesalers pay at one of some 400 rack markets across the United States. The rack price then influences the price paid by drivers.
Let's start with the Gulf Coast spot gasoline market....
Gulf Coast Gasoline Prices Could Be Affected by Tier 3 Regulations
Looking to 2020, U.S. Gulf Coast gasoline prices will likely stick to the seasonal trends of the last several years, but still see an influx of issues that could affect gasoline costs per gallon – most notably Tier 3 regulations arriving this year.
The new rule says refiners and blenders need to reduce their gasoline sulfur content to 10 parts per million or less annually, or purchase credits to offset higher-sulfur fuels. Most bigger refiners have already been meeting this specification, but some smaller refiners were granted waivers after the initial deadline in 2017 but must meet the 10-parts-per-million requirements in 2020.
The credit options to offset fuel have skyrocketed the last few months, moving from around $1,000/credit in late August 2019 to over $3,500/credit, with some market watchers thinking there is room for those to get higher. At $3,500/credit, that would add about 3.5cts/gal to the cost of any off-spec gasoline being made.
Most refiners are meeting the specification by adding desulfurizing units to their gasoline refining process, such as hydrotreating in the fluid-catalytic-cracking stream. But although that process removes sulfur from the fuel, it also lowers the octane yield. The process of meeting the new sulfur requirement could create a shortage of octane, boosting the prices of octane boosters such as alkylate, reformate or isomerate and of premium gasoline products.
In anticipation of the lack of octane, some plants in the Gulf Coast are investing in new alkylate units set to come online in the next few years.
A slate of planned refining maintenance in the first quarter of 2020 will likely help keep Gulf Coast gasoline prices a little more elevated. But prices will see the typical bounce as RVPs drop heading into the warmer months and fade going into the last half of the year.
Any hurricane disruptions could cause spikes over the last two quarters of the year, but typically, any storm disruption is short-lived with refineries restarting soon after an event.
For Colonial Pipeline gasoline line space on Line 1, values will likely stay at a premium into 2020. Most of 2019 saw gasoline prices at a discount to pipeline costs, but the fire and subsequent shuttering of the Philadelphia Energy Solutions plant in the Northeast sacked production in the region. That boosted New York gasoline prices and increased demand for resupply from the Gulf.
Northeast Gasoline Finding Its Footing After PES Refinery Closure
During 2019, the U.S. Northeast gasoline prices saw a dramatic shift, when, on June 21, the 350,000-b/d PES refining complex experienced a series of explosions, followed by a massive fire, which ultimately led to the closure of the facility.
Following the explosions, imports into the region picked up, to help cover the loss of barrels from the closed refinery, with cargoes being diverted from the West Coast to the East Coast, in addition to cargo deliveries from various points around the globe.
The extent of the lost PES barrels can be seen most clearly in the region's use of its refining capacity. EIA data indicate that, before the incident, refinery utilization rates for 2019 were averaging around 81.5% of capacity. After June 21, those rates dropped to an average of about 67.6%. For context, the average utilization rates in 2018 were approximately 87.1%.
High-octane gasoline prices saw differentials jump in the second half of the year.
Because alkylate is a key component of premium RBOB gasoline, high-octane barrels were tight in the weeks after the PES refinery closure.
Heading into 2020, high-octane supplies could tighten as Tier 3 regulations go into full effect. In response to these requirements, it is anticipated that refiners will increase the severity of hydrocracking, a process that reduces octane content and could lead to increased demand for alkylate. That, added to the lack of PES alkylate, could see regional prices rise again in the new year.
In terms of regular octane gasoline, looking to gasoline price futures as an indication of spot RBOB pricing, New York Harbor RBOB is expected to peak in April or May, with the transition to lower RVP – and more expensive-to-make summer-grade gasoline specifications. Prices are then likely to come off in the fall, after peak driving season, and with the transition back to winter gasoline specs.
Midwest Gasoline Awash in High Gasoline Stocks
Midwest gasoline markets have significant supply levels that will be an emphasis in 2020, sources said.
The levels of gasoline inventories accumulated toward the end of the year represent a concern moving forward, a source said. The data may have reflected some noise due to the holidays, but the size of recent builds poses a potential problem, the source said.
Gasoline production has shown no signs of slowing with economics incentivizing high runs, and refiners may become more aggressive in trying to move their inventories, a trader said.
Midwest gasoline inventories reached 51.6 million bbl for the week ended Dec. 13, down from 54.3 million bbl at the end of 2018, according to EIA data.
Regional gasoline stocks averaged 52 million bbl through mid- December 2019, according to EIA data, down from an average of 53.5 million bbl in 2018.
Gasoline dynamics could pose a challenge for refiners in the region, sources said.
Midwest gasoline barrels will need to price to be able to find arbitrage opportunities out of the region to clear barrels or refining cuts may need to be considered locally, a source said.
Soft crack spreads on the gasoline side could lead to run cuts unless pricing support comes in the way of higher gasoline futures or differentials or a downward repricing in crude, a source said. A drop-off similar to the decline in energy prices at the end of 2018 could provide that, the source added.
In addition to inventory levels, market sources said they will be monitoring seasonal RVP shifts and the summer driving season in 2020 for potential opportunities.
"I expect gas to remain choppy kind of like in 2019," a trader said.
The Tier 3 sulfur regulations, however, should not represent a concern for the region with refiners seemingly in position to comply, sources said.
Get more trends for U.S. gasoline prices in the newly released 2020 OPIS Oil Market Outlook.