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The major refiners will release earnings by mid-November, and the refining margin results will likely disappoint Wall Street.

Most analysts anticipate weak 2024 third-quarter refining margins, and earlier in October, ExxonMobil, BP and Shell warned of lackluster earnings potential.

ExxonMobil said lower oil prices during the third quarter would reduce its earnings by anywhere from $600 million to $1 billion. Lower refining margins were expected to have a similar impact. BP said it expects a $400-600 million hit from soft refining margins.

Shell said that it expected its refinery utilization rates in the third quarter to come in somewhere between 79-83% after forecasting 83-91% in early August. The lower utilization was due to turnarounds in the Netherlands, Germany and U.S. Shell moved up maintenance at its 250,000 b/d Norco refinery in Louisiana after a power outage stemming from Hurricane Francine shutdown a hydrocracker there.

After the outsized refining margins of 2022 and 2023, the search for what a mid-cycle margin might look like may have been found.

OPIS chart: Quarterly Average Refined Product Crack Spread Vs. WTIBased on NYMEX WTI, RBOB and ULSD futures, the average RBOB crack spread in the third quarter was $19.94/bbl, which is down roughly 38% or $12.35/bbl from the 2023 RBOB crack spread of $32.29/bbl.

The recently completed quarter’s RBOB crack is also less than 2021 and 2022, but it compares quite favorably with the crack spreads in a five-year span from 2015 to 2019 when the average NYMEX RBOB third quarter crack spread was $17.96/bbl.

It would be nearly impossible for diesel to have the same third-quarter performance as it did in the third quarters of 2022 and 2023, when the ULSD-WTI NYMEX crack spread averaged $57.64/bbl and $44.97/bbl, respectively. The most recent third quarter came in at $22.26/bbl, a roughly 50% haircut from a year ago.

Like gasoline, the third-quarter NYMEX diesel crack spread compares more closely with the 2015-2019 period. The average crack spread during that five-year stretch was $20.11/bbl, which sees the 2024 third quarter roughly $2/bbl better than that five-year average.

One certainty, though, is that the third quarter was uneven. The quarter started rather strong in July, but the paper crack spreads decreased in value in the following two months.

While the NYMEX crack spreads are typically a good guide for refinery profitability, looking at the seven U.S. spot markets reveals that very few markets achieved what the paper markets had indicated. Throw in the Renewable Volume Obligation costs and some spot markets significantly underperformed versus the paper market.

Like the paper cracks, some markets turned in the same uneven performance with stronger margins at the front end only to see the crack spread fade into the end of the quarter.

OPIS chart: Gulf Coast Spot Crack Spread Monthly AverageOn the Gulf Coast, the conventional blendstock gasoline market went from a July average versus light sweet crude oil delivered to Houston of $16.95/bbl to just $1.92/bbl in September. When considering processing costs and the renewable volume obligation costs, it’s not a stretch to say that there were multiple days when Gulf Coast refiners were making gasoline at a loss.

Overall, the gasoline crack spread on the Gulf Coast averaged $8.77/gal. Gulf Coast diesel also saw a similar pattern with a $22.70/bbl July average eroding to $9.33/bbl and a quarterly average of $14.38/bbl.

The Gulf Coast gasoline and diesel crack spread was down in the neighborhood of 30% from the second quarter.

The West Coast went against the trend seen in the paper markets and on the Gulf Coast, as the average CARBOB margin rose through the third quarter. The gasoline crack, against Alaska North Slope crude oil, certainly appeared to be more pedestrian, especially compared to the first and second quarters of 2024.

Los Angeles saw an average third-quarter CARBOB margin of $18.40/bbl, according to OPIS spot market data. The July average was inside of $12/bbl, which was the lowest month of 2024 so far. By September, the average margin bumped up to $23.72/bbl. The stronger September was thanks largely to softer crude oil prices, as ANS in September averaged $74.44/bbl. At the same time, the average spot price, according to OPIS data in L.A., was $2.3373/gal.

CARBOB refining margins in San Francisco were about 37% better than Los Angeles’s in the third quarter, averaging $25.21/bbl. Like the L.A. market, the San Francisco CARBOB margin was also aided by the falling price of ANS.

While gasoline crack spreads took a step back, those able to process heavy sour crude were faring much better.

Chicago area refiners that process the heavy Western Canadian Select saw CBOB cracks consistently above $20/bbl, with a third quarter average of $22.31/bbl. ULSD versus WCS averaged $26.63/bbl in the third quarter.

Overall, the Chicago 3:2:1 crack spread against WCS, according to OPIS data, averaged $23.75/bbl, which was largely in line with the second quarter. Compared to WTI futures, the 3:2:1 crack spread in Chicago generally trailed heavy sour crude by about $5/bbl.

Of course, gasoline is always cyclical, and in the past two years, refiners have been able to lean on diesel and jet fuel production, which was not the case during the third quarter.

Diesel was a bit more mixed. Some markets, like Chicago, saw the diesel crack improve by a few dollars per barrel from the second quarter to the third quarter. Gulf Coast saw the diesel crack drop by more than $5/bbl from quarter to quarter.

The San Francisco market saw the largest pullback in the third quarter, dropping $9/bbl. California markets have seen legacy hydrocarbon-based diesel being replaced at a significant clip by renewable diesel. However, even with the incentives, renewable diesel also saw some of its margins clipped in the third quarter.

It should also be noted that the third quarter is among some of the softest periods for diesel demand.

While there was plenty of discussion of strong air travel during the 2024 summer, refiners did not reap the benefits of the stronger demand in the form of strong pricing for jet fuel.

Every spot market saw jet fuel prices drop from the second quarter to the third with the crack spread falling anywhere from about $3/bbl to as much as $8.40/bbl. As a result, a 6:3:2:1 (six barrels of crude oil yields, 3 barrels of gasoline, 2 barrels of diesel and 1 barrel of jet fuel) in several markets were down $3 to $6/bbl in multiple markets.

Besides product weakness to close out the third quarter, the renewable volume obligation cost was seen going up throughout the quarter.

During the third quarter, the RVO averaged 9.27cts/gal or $3.89/bbl, which is the highest quarterly average of 2024. While the third quarter for refining margins are off to a good start, picking up from where September averaged, the RVO is also moving higher as the month to date average for October stands at 10.36cts/gal or $4.35/bbl.

May can be a Jekyll and Hyde type of month when it comes to gross rack-to-retail margins, but the 2024 rendition is certainly the version that downstream marketers would like to see on a regular basis.

Based on the latest OPIS data, the average gross margin for the month of May came in at 45.9 cents per gallon. The May average margin was the strongest one-month average since November 2023 and it was easily the strongest May on record, as no other May has come close. Over the past 10 years (including 2024) the average margin for May was around 26.5 cents per gallon.

Although June is just getting started, the early returns for margins show a similar trajectory for this month, though that can change quickly, considering the volatility in markets.

The month of May certainly experienced some volatility in the average gross margin, but it was from a higher level. During the month, the daily U.S. gross margin averaged anywhere from a low of 33.4 cents per gallon at mid-month, and the high of 53.8 cents came on the last day of May.

May 2024 Daily Gross MarginGasoline futures markets, as well as several spot markets, made the strong margins somewhat easy to predict.

The highest gasoline futures settlement of May was on the 2nd at $2.5965 per gallon, but by May 30th the futures market had tumbled by more than 19 cents per gallon, settling at $2.4046 per gallon.

Futures markets only tell part of the story that contributed to a strong gross margin environment as spot prices in several markets exceeded the decline seen on the paper side.

May 2024 Daily L.A. and San Francisco Spot CARBOB MeanAt the beginning of May, Los Angeles CARBOB was pricing around $2.825 per gallon, with San Francisco at $3.015 per gallon, OPIS spot market data shows. But by the end of the month, L.A. gasoline was almost 40 cents cheaper at $2.4275 per gallon with San Francisco more than 50 cents cheaper ending the month at $2.4975 per gallon.

That move, as you may have guessed, supercharged margins throughout the month. The California average gross margin started May at 73.2 cents but ended just shy of 92 cents, with the average gross margin about 6 cents below the highs at 86.2 cents.

A strong margin environment is necessary to make up for lost gallons as same-store sales are down compared to the previous year, based on OPIS monthly gasoline demand data.

With the summer driving season officially underway, retailers will be looking for some positives, and there are some if you happen to be a “glass half full” person.

2024 started the year with very soft gasoline demand, with January running almost 7% below January 2023. However, January is typically the softest month of the year when it comes to gasoline consumption. Since January, the deficits to 2023 have been narrowing.

Monthly Percent Change 2023 vs. 2024Though month-to-month volumes are getting some traction, same-store sales versus 2023 are still looking soft. Final May gasoline demand was about 4.2% below May 2023, but if you are looking for the positive, the year-on-year trend is narrowing as the month of May saw the smallest loss in volume compared to a year ago. In fact, May was the smallest year-on-year loss since August 2023.

The monthly improvements are seen in most individual regions.

The heavily populated Northeast region has been consistent in its declines versus 2023 over the past three months with year-on-year declines in the 4.6-4.8% range versus 2023. While the Northeast sees the steady demand drops versus a year ago, the Mid-Continent sees a bit wider same-store sales losses on either side of 5% down.

Southwest is turning in the strongest demand with May running just 2.4% behind 2023. Other than in January when weather was poor, Southwest gasoline demand saw the largest demand destruction, but over the past 12 months, the Southwest has been in striking distance of year-ago levels.

While most point to sliding gasoline demand on the West Coast, the Pacific Coast region performed admirably in May falling 4.2% versus last year.

Based on the latest OPIS data, on a year-to-date basis same store sales are down by 5.3%. Individual regions range anywhere from down 3% to down just over 6%.

Year-on-year market share in May 2024 saw mostly minor shifts between branded and unbranded stations with unbranded stations in the U.S. grabbing a bit more market share against the branded outlets and perhaps to a lesser extent some of the big box retailers thanks to relatively calm retail gasoline prices.

May 2023 Marketshare Branded vs. Unbranded During May 2024, unbranded stations in the U.S. garnered 56.09% of the market, compared with 55.58% during the same month a year ago. Meanwhile, branded market share slipped from 44.23% in 2023 to 43.69% in the recently completed month.

Although some of the big box retailers did see a bit of market share erosion, those, along with some of the grocery chains, remained some of the most efficient sites in the U.S., selling quite a bit of fuel considering much lower station counts than the brands and some of the large regional chains.

Buc-ees, Costco and Sams Club had the highest efficiency ratings, according to OPIS AnalyticsPro data, but in all three cases, efficiency was down nominally from a year ago H-E-B, Wal-Mart and BJ’s all saw efficiency gains, but even with efficiency figures north of 6, they are still about one-third that of Buc-ees. Kroger, Ingles, Frys and Fred Meyer rounded out the top 10 in efficiency in May.

May 2024 Marketshare Branded vs. UnbrandedCostco maintains its spot as the most aggressive when it comes to pricing, as the average Costco price was 32.9 cents below the local average, which is just over 2 cents more of a discount than last May. One of the bigger movers in average price discounts versus the local average was California-based Flyers. There are 23 brands in the OPIS database priced 25 cents below the local average, increasing the discount from last year by 18 cents.

With May 2024 priced several cents higher than May 2023, big box retailers and some chains used it as an opportunity to become more aggressive on street price.

Expect to see plenty of news stories this spring that warn of US gasoline prices about to move above $4/gallon. Prices might creep or race higher in the rest of April but there is reason to believe that the American gasoline price landscape will resemble a Bactrian camel. We’re almost certainly in the latter stages of the first “hump,” which may crest in the $3.75/gal neighborhood before retreating. Most critically, however, a second midsummer peak looks to be equally predictable.

The latest rally in pump prices, representing the first hump of the Bactrian camel, is not tied to Middle East violence and the threat of a broadening war. Instead, the advances come thanks to the transition seen every spring when the EPA begins to enforce summer gasoline standards. Motor fuel is a mix of 7 or 8 hydrocarbons plus ethanol. Some of those hydrocarbons—like butane—are very cheap but much too volatile to bake into spring and summer gasoline recipes.

All the Northeast is transitioning to this more expensive recipe in April 2024. Wholesale prices have already increased by 30-32cts/gal and gasoline retailers will play catch-up to those moves so as to achieve reasonable margins. The good news is that much of the rest of the country has already transitioned to the less volatile but more expensive summer gas. Be prepared to witness some states retreating even as northern states move to higher pump prices.

Once the US national average approaches $3.75/gal, we’ll undoubtedly see many stories trumpeting a certain move to $4/gal or even $5/gal or more. California is already flirting with a statewide average over $5.50/gal, and regionally high numbers are observed in Arizona ($4.13/gal), Nevada ($4.65/gal) as well as Oregon ($4.44/gal) and Washington ($4.67/gal).

OPIS does not believe that average US street prices will hit $4/gal in the first half of 2024.

Local gas prices can be as variable as real estate costs. One can easily find gasoline in Denver for just over $3/gal but most other states in the Rocky Mountain and Pacific Time Zones are $1.00-$2.50/gal higher.

History Always Repeats Itself in the Gasoline Futures’ Markets

Why is there so much confidence in the limited ascent of the first hump?

Intelligence plays a key role in gasoline futures’ speculation and investing to be sure, but it takes a back seat to herd behavior. One of the strongest seasonal tendencies among all commodities is the template for an early winter RBOB low, rising to an early second quarter peak.

On April 12, 2024, CME RBOB traded at a high-water mark of $2.8516/gal, reflecting a gain of 88.43cts/gal from the low recorded on December 13, 2023.

If these dates seem familiar, they should be. The 2022-2023 cycle also brought a low on December 13, 2022, and the first half 2023 peak was achieved on April 12, 2023, at $2.8943/gal.

It’s not too early to estimate whether the April 12, 2024, futures’ rally could represent the top of 2024’s RBOB price appreciation. Number crunching through the years yields some interesting parallels. A canvas of the last 20 years of futures’ performance confirms that 50% of spring tops occurred in March or April. The average peaking date? April 13.

As the days get longer, the odds of panic liquidation for speculative buyers in gasoline increase substantially. Being long RBOB futures in March and early April is like riding Secretariat 50 years ago. By Kentucky Derby weekend, betting on higher futures’ prices has a Mr. Ed quality.

All the US bulk markets for wholesale gasoline trade based on a relationship to RBOB futures. One might say that RBOB futures act like the Fed Funds’ rate, and every region’s bulk prices trade like an adjustable mortgage that adjusts every day. There is great variability in the regional numbers—Mid-April gasoline sells for 24.5-35cts/gal under RBOB futures quotes in the Midwest and Gulf Coast and fetches a modest premium of 1.5cts/gal in New York Harbor. Western markets are notably more expensive, commanding 30-40cts/gal over RBOB contracts.

If 2023 indeed proves to be an appropriate analogue, RBOB traders and every member of the refinery-to-retail distribution sector need to take notice. After peaking at $2.8943/gal last April 12 2023, RBOB futures had a rough three weeks. On May 4 2023 front month futures slipped to just $2.25/gal, reflecting a decline of over 64cts/gal. Retail prices peaked at $3.6855/gal on April 20 but spent most of May, June and the first part of July at about $3.55/gal.

The Second Hump Beckons in the Third Quarter

A second retail gasoline peak in late summer has been common in the 21st century. This year looks especially prone to a return to more expensive gasoline, not just in the US but in most of the world.

OPEC+ may begin to increase crude production in the second half of 2024, but it might not have an impact until the last 100 days of the year. There is a strong historical tradition of crude oil and RBOB declines from early autumn into winter, but prices tend to remain high into September. When summer arrives in Saudi Arabia, the Kingdom has less crude oil for export since it relies on more than 500,000 b/d to process through utilities that generate the electricity needed for ambitious air conditioning.

August is also the highest global demand month on the calendar. There isn’t an entity that measures global demand with precision but most assessments suggest that demand outpaced supply last August by 1.5-million b/d or more, even without any real consumption growth from China.

However, the true wild card for gasoline this August is the hurricane season. Hurricanes wiped out substantial U.S. refining capability in 2005, 2017, and 2021. Water temperatures in the Gulf of Mexico and Atlantic Ocean are currently several degrees above what would be normal for April. Meteorologists also expect that the El Nino climate cycle will give way to an onset of La Nina by August, incubating perfect conditions for a very active hurricane season.

If you believe the US is better prepared to handle hurricane impacts on refineries, you may want to reconsider that view.

Back in 2005 when Katrina came onshore near New Orleans, the four states of Alabama, Louisiana, Mississippi and Texas accounted for 8.1 million b/d of US refining capacity. This year, those four states have nearly 10 million b/d, much of which is at risk.

In 2023, there were no hurricanes that threatened the real estate that houses refining complexes. But we still saw a substantial gasoline price rally last August and September.

Substantial fuel for the rally came from “storm chasers”—traders and marketers who saw fit to purchase RBOB futures or options as insurance against a hurricane impact. That action may simply be a preview of a late summer buying spree that is likely to be reproduced in 2024.

If we’re lucky and the coastal geography escapes the wrath of tropical weather, there’s a final act that is almost certain. Wholesale and retail gasoline prices are inclined to move sharply lower during the last 100 days of 2024. Additional non-OPEC crude production might hasten this denouement after the twin climaxes of April and August.

Buying fuel is confusing even for seasoned pros. We’re here to help.

The petroleum market features a slew of specialized fuel blends and no one-size-fits all requirement for what you can use — or where or when you can use it.

Whether you are new to the fuel industry or are already an expert, the words “spot,” “rack” and especially “basis” are terms that confuse even the most veteran buyer. There’s a good chance you or someone on your team may not be 100% sure what these words mean.

Why Is It Important to Understand These Fuel Pricing Basics?

 

Chances are you already have a fuel contract with a supplier in place. Maybe you are looking to set one up or modify one that already exists. Without a firm handle on what the difference is between futures, spot, rack and retail markets there’s a good possibility that you:

Let’s clear up some confusion with a basic guide to pricing gasoline and diesel. Much of what you will learn here also applies to jet fuel, LPG and renewables.

fuel-buying-101-snippet

Step One: Getting to Know the Futures Market

Before you can understand spot and rack prices, you need to understand the first piece in the downstream fuel puzzle: The New York Mercantile Exchange.

The industry commonly refers to this as the NYMEX or the Merc. Sometimes it is called “the futures market” or “the print.”

It’s a mostly electronic platform exchange, on which buyers and sellers can trade various fuel commodities — on paper — any time from a month from now to 18 months in the future. That’s why it’s called a “futures” market.

They call it a “paper” market because few, if any, physical barrels ever change hands. Trade volume is made up of contracts that transact among players.

From here on out, to reduce any further confusion, we’ll refer to it as the NYMEX. The NYMEX is possibly the most influential factor in the upward/downward movement of wholesale rack markets. Oil futures affect spot markets, then rack markets, then ultimately retail markets.

The first energy contract was launched in 1978. Since then, the Merc’s launched contracts for:

These abbreviations are what you’ll see on the trading screen, so add them to your alphabet soup full of acronyms to memorize.

Thanks for the History Lesson But What’s In This for Me?

One word: Transparency.

The NYMEX really took off as a major factor in the U.S. petroleum market back in the 1980s because it was the only place refiners, suppliers, traders, jobbers, retailers and procurement end-users had full access to see the value of a commodity at any given time.

The transparency was generally not for real barrels of crude oil that you could turn into gasoline. Remember, this is mostly a paper market – physical delivery only occurs for 2% to 3% of all contracts on the current NYMEX. But, at that time, unlike today, there was no downstream price discovery.

So, the futures market became a place where fuel buyers or sellers could go to find a cost basis for fuel supply agreements. This is why, when we talk about the NYMEX, we start to introduce the concept of “basis.” More on that later…

Since the 80s, price transparency has extended to the spot market (the refinery level) and rack market (the wholesale level). We’ll dive deeper into those markets in the sections that follow. But, that clear level of transparency has always remained on the NYMEX.

In addition, the exchange is regulated by the CFTC (Commodity Futures Trading Commission), adding a level of accountability to every 1,000-barrel, or 42,000-gallon, contract traded.

The paper market is used to hedge physical fuel purchases – kind of like insurance for prices rising or falling, to protect the companies holding contracts from losses related to their physical energy business. But, for our purposes right now, the critical point is that it is the primary building block of
downstream gasoline and diesel pricing.

There are two other key elements about the futures market:

  • First, the trades are anonymous.
  • Second, and most importantly, the exchange guarantees counterparty performance. No chance of an Enron-like implosion here.

fuel-buying-101-isaacHowever, the Block Is Rarely Stable

Military conflicts, hurricanes, domestic refinery problems, fluctuations in domestic output abound. Often, the first trace of any breaking news is seen on the futures screen, because oil prices spike and dive.

Take a look at this chart to see how Hurricane Isaac sent futures flying and how the market volatility continued.

The NYMEX tends to react to big-ticket items, like:

Sometimes the market “prices in” so-called fundamental factors. For example, if the U.S. government is expected to show crude stock supplies falling by a large amount, the market might slowly crawl higher in advance of the weekly inventory report as opposed to rallying sharply when expectations prove true. On the other hand, a quickly developing weather event can lead to immediate price swings.

And the market also responds to seasonal trends. For example, the RBOB market tends to peak ahead of summer driving season. The ULSD contract (a proxy for heating oil) will often spike on the first chilly fall day.

Some terminology you will hear when people talk about the market:

But, What Does This Mean in a Market That Trades ACTUAL Barrels?

The NYMEX is the first column in your price equation. If RBOB futures go higher, it will send gasoline prices up right through the fuel chain — unless the next link in the chain does something to counteract it.

Understand the fuel chain from start to finish with this helpful e-Book from OPIS.

The Seven-and-Seven Oil Cocktail

Oil pundits predicting a return of $75/bbl or higher benchmark crude prices are delusional.

They are either obsessed with predicting what they prefer to happen for their own investments and clients, or are unaware of what the seven and seven oil cocktail means for price forecasting. Hint: it should temper prices into the new decade. 

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