Brian L. Milne, Refined Fuels Editor, Telvent DTN
The odd pairing of weak demand for gasoline while supply is tight has been a running theme in the U.S. for much of 2012, while unplanned refinery outages have had a more dramatic effect on certain regional markets, the latest in California.
On the heels of a tight market along much of the East Coast in September comes the abrupt shift to spiking prices in the Golden State, where wholesale spot prices for the state’s specific gasoline blend surged to record highs during the first week of the fourth quarter. Spot prices are falling sharply now, but not before gasoline in the Los Angeles market spiked to a much as a $1.75 gallon above November RBOB (Reformulated Blendstock for Oxygenate Blending) futures trading on the New York Mercantile Exchange. NYMEX November RBOB futures ended in the mid-$2.90s gallon at the time, setting the stage for $5 gallon gasoline at retail outlets.
The trigger for the price spike in California gasoline was a power outage on Oct. 1 that forced shut ExxonMobil’s 149,500 bpd Torrance refinery amid other ongoing refinery issues in the state and in front of scheduled plant maintenance for this week. Coming into October the market was still contending with lost crude deliveries in northern California amid a contamination issue on a Chevron Pipeline.
View Telvent DTN’s Weekly and Historical Gasoline Price Index.
The confluence of these events drained available supply, with major suppliers including Valero, ExxonMobil and Tesoro temporarily withdrawing from the spot market due to limited product. Several media reports spoke of gasoline stations running out of fuel, while some independent outlets said selling gasoline at $5 gallon would still not cover their costs.
After bolting to record highs on Oct. 4, spot gasoline prices in the L.A. and San Francisco markets, which is trading at a roughly nickel discount to L.A. values, have tumbled sharply, pressured by the return of the Torrance refinery, easing pipeline issues, and a state waiver allowing for an early transition to winter grade gasoline specifications.
Late Sunday (10/7), the California Air Resources Board said it “is immediately taking necessary steps to allow for an early transition to winter-blend gasoline that can be manufactured, imported, distributed, and sold in California” following direction from the state’s governor, Edmund G. Brown.
The transition to a winter grade formula would normally occur on Nov. 1.
CARB, the state’s regulatory body, said “Due to the convergence of a number of recent events (e.g. refinery fire, electricity interruption, pipeline contamination) and planned shutdowns of several refineries and pipelines, the gasoline market in California is currently experiencing tight supplies.”
Winter-blend gasoline is a mixture that evaporates more quickly than the gasoline sold in summer months, which takes longer to evaporate and is better for air quality during the smog season. Allowing an early transition to winter-blend gasoline could increase California’s fuel supply by up to an estimated 8% to 10% with “only negligible air quality impacts,” said Brown.
While gasoline in the L.A. and San Francisco spot markets are now tumbling, down as much as $1.35 in cash differential early Monday (10/8) from Thursday’s record high, the sudden price surge is not yet fully reflected in retail prices. As a result, consumers in California should expect higher gasoline prices in October than history would otherwise suggest.
About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 16 years as an analyst, journalist and editor. He can be reached at email@example.com.