The U.S. average retail price of diesel fuel fell below that of regular gasoline earlier this month for the first time since 2009, reflecting stellar overall gasoline demand and unusually high Californian retail prices, although the phenomenon will likely be brief, the U.S. Energy Information Administration said on Thursday.
The average U.S. regular gasoline price was 2.802/gal for the week ended July 20, 2cts higher than $2.782/gal for the average diesel fuel price, as gasoline has surpassed diesel for a second consecutive week, EIA's data showed.
It was the first time since early August 2009 that retail gasoline was pricier than diesel fuel. From August 2009 through June 2015, retail diesel fuel sold at an average of 34cts/gal over regular gasoline, with the difference reaching a peak at 90cts/gal in January, according to the EIA.
According to GasBuddy.com, which provides retail fuel pricing information and data, U.S. diesel's premium over gasoline was the highest in the West Coast, at over 40cts/gal last week. The only other region that also saw the diesel- gasoline inversion was the Midwest at 3.50cts/gal, with prices at the Gulf Coast and Southwest close to parity in the week ended July 19.
While diesel demand tends to be the weakest in the summer, U.S. and global demand for gasoline was unusually strong this year. In addition, even though gas prices at the pump in most parts of the U.S. have followed crude oil prices lower, the national average retail price was lifted by skyrocketed retail gasoline prices in California due to ongoing supply disruptions there.
Traditionally, relatively higher diesel prices reflect a combination of strong global diesel demand, U.S. federal fuel taxes that are 6cts/gal higher than those for gasoline, and higher production costs of ultra-low-sulfur diesel that was phased in between 2006 and 2010 in the Northeast, which accounts for more than 80% of the U.S. heating-oil demand.
However, the rare price parity between U.S. gasoline and diesel retail prices is likely to be a short-term phenomenon, as mogas consumption moderates with the end of the summer-driving season and diesel demand grows in response to agricultural harvest in the fall and the increasing use of home heating oil during winter, the EIA said.
The EIA expects retail gasoline prices to average $2.27/gal in December 2015, compared to diesel fuel's $2.87/gal, it said in its July Short-Term Energy Outlook.
Phillips 66 said it is expanding the accessibility and potential use of E85 by letting marketers in four states offer the blend of 85% ethanol and gasoline under the branded canopy.
The test, launched in response to some marketer demand, affects about 1,300 sites in Iowa, Illinois, Nebraska and Colorado. The states were selected based on requests from marketers and the availability of ethanol.
"Phillips 66 believes the key to a secure energy future is the efficient and effective use of a variety of energy sources," the company said in an announcement. "Ethanol is one energy option which includes other renewable and alternative fuel sources, as well as traditional energy sources like crude oil and natural gas."
Under its normal policy, the major requires branded marketers selling E85 to dispense the blend outside the branded canopy in a separate unbranded fueling dispenser. That policy remains in effect for sites excluded from the pilot program.
And Phillips 66 said it still expects marketers in the E85 test to meet its new image standards.
The major said it will measure customer response to the pilot along with "other operational, demand and quality metrics ... to determine a future offering."
Prices for heavy sour Canadian crude continue to tumble by far more than futures benchmarks such as Brent and WTI. The slide has initially widened margins for refiners in the Great Lakes and Rockies, but it could ultimately result in spot gasoline and diesel prices that approach or slip beneath last winter's lows.
The price of Western Canadian Select (WCS), the closest thing to a benchmark for oil sands production, is now assessed at around $35.50/bbl. Some of that decrease comes thanks to a drop in the August WTI futures quote, which was at $51.25/bbl at presstime, but about $8/bbl of the summer decline is attributable to aggressive discounting by producers who need to find a home for output.
Earlier this summer, WCS sold for a discount of just $6.50-$7.50/ bbl off WTI futures at the Hardisty, Alberta, origination point. This morning finds sellers talking a $15.75/bbl discount for August barrels, and the discount averages some $15.30/bbl off WTI for the rest of 2015. Producers regularly were able to get more than $50/bbl for WCS in late May and early June, but there is the clear prospect that values could flirt with $30/bbl, just as they did at the bottom of the global market last winter.
The wider discounts come thanks to the return of production knocked out by spring wildfires and some upgrader work. But majors such as ExxonMobil's Imperial affiliate continue to ramp up production, and some late-summer turnaround work by refiners such as Flint Hills at its Pine Bend refinery diminished demand. Some other PADD2 maintenance could keep heavy crude oil blends under pressure through autumn.
Companies like Flint Hills, as well as BP (Whiting) and Marathon (Detroit) are the beneficiaries, along with several refiners in the Rocky Mountain region. Delivered barrels of Canadian heavy crude can lay in to plants at $38-$40/bbl. Even with recent price drops, diesel is priced at nearly twice the value of crude, while Chicago CBOB and RBOB sell for $75/bbl and $85/bbl, respectively.
Put another way, diesel and gasoline could lose another 30-50cts/gal and still keep some Midwestern refineries in the black on fuel margins.
Chevron said on Tuesday that it will increase its U.S. Gulf Coast 600R base oil price by 15cts/gal to $3.15/gal, but it will keep prices unchanged for the other two grades.
The price adjustments reflect the prevailing market demand and supply, the company said. The latest price cut will be effective on Wednesday.
The price of the 100R grade remains at $2.65/gal, and the 220R grade is at $2.80/gal.
Base oils are the building blocks used to manufacture motor oils and other lubricants for consumer and commercial use.
Chevron began to post Gulf Coast base oil for the first time in September 2014 after starting up a new 25,000-b/d base oil plant at its Pascagoula, Miss., refinery in late July.
Besides the Gulf Coast, Chevron also sells base oil in the West Coast market, but Chevron is no longer posting prices on the West Coast.
Chevron's supply on the West Coast is supplied by its Richmond base oil plant.
Chevron also produces base oil at a joint-venture refinery in Yeosu, South Korea.
Barclays Capital said on Tuesday that it is too early to draw any conclusions on whether the gasoline market could face an imminent collapse given its high stock levels which in turn could lead to substantial under-performance of the refiners.
However, the bank believes the gasoline market will remain strong due to stronger-than-expected international and domestic demand. Also, the rising U.S. gasoline inventory is perceived as not in excess, and the U.S. gasoline market is facing expensive octane values.
The U.S. market is currently short octane. In other words, despite the currently very high CBOB inventories, the industry will have difficulties to quickly convert the excess CBOB into finished gasoline, the bank said.
"We believe the U.S. gasoline market has gone through a full 360-degree turn in octane supplies. Before 2005, the U.S. market historically was short octane," the bank said.
Between 2005 and 2011, the octane balance has shifted toward excess supplies due to the rising ethanol usage in the U.S. gasoline market, it said.
However, the octane balance has once again turned after 2011 due to rising Eagle Ford production, Barclays said.
Since half of Eagle Ford oil production is actually lease condensate which has a very high naphtha yield, the rising Eagle Ford production has led to increasing volumes of naphtha being blended into the gasoline pool, particularly since the plunge of oil prices from last June.
Traditionally, naphtha is used as a feedstock into the reformer and correspondingly converts into reformate, the high octane gasoline blending component.
"Because we think the industry has already maxed out the usage of the reformers, the continued rise in naphtha supplies will need to be blended directly into the gasoline pool without the reformer," the bank said.
While it is certainly possible, this direct blending will require additional octane supplies.
In the winter, because of the less stringent vapor pressure requirement, the octane shortage is not a major issue since the refiners have been able to acquire additional octane via the blending of butane.
On the other hand, as the industry shifts to the summer grade standard, this has become increasingly a problem in recent years, it said.
The lack of octane means that refiners will have difficulty quickly converting the excess CBOB into finished gasoline.
This explains the widening seasonal volatility of gasoline crack between the third quarter and fourth quarter as well as fourth quarter and first quarter over the last couple years.
"Our hypothesis seems to be supported by the U.S. changing octane values over the last several years. We isolate the market value of octane by taking the average price difference between premium and regular gasoline," Barclays said.
The average differential in 2010-2012 was $0.25/gal, $0.32/gal between 2013- 2014 and the 2015 year-to-date differential is $0.39/gal.
Eventually, the blendstock components will have to make their way into finished products, so higher blendstock inventories now could potentially exert downward pressure on gasoline prices in time, the bank said.
But overall, gasoline cracks will remain strong due to strong domestic demand (according to the latest DOE revision, first quarter gasoline demand rose 3.4% year-on-year) and the lack of octane which suggests that the pace of blending CBOB into finished gasoline may take longer than expected.
Also, looking at RBOB, current inventories are not in excess of their normal levels, thus adding to the bank's optimism.
The bank also believes the international gasoline market is stronger than expected.
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