Oil, gasoline, diesel and renewable fuels markets have started 2020 off with a bang.
Here are 20 price-influencing factors identified by OPIS experts and those of our parent company, IHS Markit, that stand to sway the markets this year and beyond.
- Petroleum futures markets will continue to be susceptible to “non-traditional” supply and demand details. Macroeconomics will have an impact on supply and demand, with trade deal headlines and gross domestic product announcements holding the most potential. Meanwhile, the COVID-19 coronavirus has emerged as a market wildcard that may cast a considerable shadow into the second quarter.
- U.S. crude oil exports consistently topped 3 million b/d in 2019, something unimaginable a few years ago. In 2020, weekly exports could breach the 4 million b/d mark. Weeks during which total crude and product exports top total crude and product imports will become more consistent.
- Countries accounting for around half of global gasoline demand have enacted – or will soon enact – tighter gasoline specifications. Several other countries are expected to follow suit by 2022. These changes will likely impact the global trade flow of gasoline and its blending components.
- The Mexican government is delaying or diluting various aspects of the previous administration's ambitious energy reform market opening, thereby tilting the scales back in favor NOC Pemex. The country is still far from closing itself off again, but product exporters in Europe, the U.S. and elsewhere will be watching closely.
- In June 2019, the 330,000 b/d Philadelphia Energy Solutions refinery experienced a catastrophic explosion, leading to its closure. This, in turn, reduced chances for additional rationalization in the U.S. East Coast any time soon. The rest of the U.S. refining industry is pretty well positioned. The biggest – perhaps only – threat to the industry may be enactment of burdensome carbon/GHG regulations.
- Gulf Coast and Atlantic Basin gasoline margins for refiners will be challenging during much of 2020. Much better prospects are likely in West Coast and Rocky Mountains markets, where imports are lighter and little refining capacity has been added this century.
- Year-end analysis of RBOB futures strongly suggested that the $1.4475/gal price recorded on Sept. 3 was the off-season low. However, front-month RBOB futures fell to $1.4360 gal on January 27 and again on February 5, 2020. An average rally would lead to a spring peak of about $2.27/gal, but odds favor a much smaller seasonal advance with April, May or June contracts likely to deliver the peak. Physical markets, especially on the West Coast, are likely to once again disconnect with the more temperate (and liquid) futures markets. The coronavirus could be a factor to watch in Pacific markets. February shutdowns of Chinese refineries tightened the market, but higher runs from existing and new plants in the Asia/Pacific region should eventually minimize West Coast gasoline spikes.
- For the fourth consecutive year, annual U.S. gasoline demand will be flat, hardly veering from the ~9.3 million b/d numbers of 2017, 2018 and 2019. But monthly variances will be greater with more “lumpiness” in consumption. The all-time monthly record number from August 2019 (9.82 million b/d) may be a peak that won’t be topped, but it is suspected that we’ll see 1 million b/d or more separate low and high demand points, similar to 2019.
- On an annualized basis, U.S. retail gasoline prices should be similar to, but modestly lower than, those in 2019. Higher local, state or federal taxes would alter this outcome. Market lows are likely to occur in December. Another year of drastic regional diversity is on tap. West Coast gasoline prices may indeed occasionally fetch 75cts/gal to $1/gal more than national prices.
- Premium gasoline spreads will widen on the street. High octane gas commanded street prices 60cts/gal above regular in 2019 despite much narrower spot spreads. Octane will be tighter in 2020, and refiners may raise wholesale price differentials since 91-93 octane does not represent the “fighting grade.”
- Retail gasoline properties will not lose their luster. The improvement in retail margins that characterized the second half of the previous decade doesn’t represent a new normal, but sophisticated price optimization software finds savvy marketers chasing dollars instead of invisible gallons.
- How will refiners compete against c-store giants in fuel retail? The value of a strong non-fuel offering is greater now that fuel demand is at or nearing decline in so many markets. So, it is unsurprising that traditional refiner-retailers are developing, expanding, or (re)investing in the non-fuel space more aggressively than in years past. However, c-store giants like Alimentation Couche-Tard and EG Group are also expanding aggressively.
- The front-month futures price for ULSD fetched about 21cts/gal more than RBOB in 2019, with occasional visits to a 50cts/gal premium. Narrow spring differences between the two benchmarks will give way to much wider premiums for diesel in the last third of 2020. However, the record spreads from 2008 (the Great Untethering) are safe.
- Total distillate inventories have been below the five-year average for nearly two years. Anticipated economic growth along with IMO requirements boosting demand for distillate should keep the streak of below-average supplies intact.
- After an initial surge in popularity in the early 2000s, the biofuels sector has progressively faded off the policy radar – or at least settled into autopilot. Yet we are now witnessing a worldwide resurgence in interest abetted by a new wave of government mandates and technological developments. Will biofuels continue to play an important role in the increasingly decarbonized future of transport? Or will markets focus more on efficiency gains and electrification?
- E15 availability will increase, but even with profitable economics (ethanol was considerably cheaper than gasoline for much of 2019), the blend will be limited to independent retailers. One interesting consideration for 2021 will be whether an independent Speedway offers E15 once it is spun off from parent Marathon.
- D6 ethanol RINs averaged 17.5cts in 2019. A recent court case that vacated EPA’s authority to extend some small refinery exemptions has lit a fuse for a RINs rally. RINs have become much more relevant for refiners, and for marketers who generate RINs through their own blends and will continue to perform well if additional small refinery exemptions are kept in check.
- Environmental policy has often found itself at odds with economic growth. However, the urgency among those on both sides of the debate has certainly increased. In countries – ranging from the United States, Mexico and even France – efforts to roll back environmental regulation are bumping up against economic considerations.
- After years of anticipation (or dread), a new era has commenced for shipping, with the maximum allowable sulfur content for bunker fuel now set at 0.5% rather than 3.5%. As expected, the price of high sulfur fuel oil has suffered while very-low sulfur fuel oil (VLSFO), has emerged as the star of the oil barrel. However, marine gasoil has so far not enjoyed much of a post-IMO bounce.
- Where are the next refining "pinch points"? Structural trends certainly favor U.S., Asian, and Middle Eastern refining industries, while disadvantaging Europe, Latin America and Russia. However, government policy could end up moving the needle, with the result having a major impact on refinery supply and regional trade flows.
Refined product demand is growing, and crude supply is relatively ample. But trade disputes and geopolitical volatility continue to lurk and it seems increasingly likely that the 2020s will represent an inflection point for the oil industry.