Major League Baseball playoff races are heating up and the importance of the offensive “big inning” is magnified in August and early September. It is also the time when marketers and gasoline retailers see some of the best margins of the calendar year.
Gross rack-to-retail margins over the course of this decade have started to grow and in some periods of the year quite significantly. The firming of margins over time has brought the axiom “40 cents is the new 20 cents.” Between 2014 and 2019, annual gross rack-to-retail margins averaged from about 22-24cts/gal, but that has all changed over the past five years.
Over time, gasoline price margins tend to be unremarkable. Investors accustomed to quarterly reports that tout 20% to 40% gross margins for technology firms don’t get excited by the very limited returns on fuel. However, the margin environment has been getting more attention of late and not only does it capture investors eyes, but also refiners and oil majors that left the retail side of the business some 20 years ago have become more involved through joint ventures.
Before 2020, profit margins on retail gasoline would barely crack 10%, more recently it is common to see that percentage rise to nearly 15% of the price of gasoline.
There are several theories as to why margins are on the rise, stemming from M&A activity over the years putting more stations in fewer hands, to increased labor costs and the current high interest rate environment in the United States. Market volatility is also playing a significant role as several global events have impacted margins whether that was the COVID-19 pandemic in 2020 or the Russian invasion of Ukraine in 2022, petroleum markets from futures down to rack have become much more volatile. Large swings in prices can have a massive impact on margins, more on that in a bit.
Typically the strongest margins come in the second half of the year when retail prices have a tendency to drop. Over the past 10 years from 2014-2023, eight times the best monthly average margin came in either the 3rd (3x) or 4th (5x) quarter. The strong autumn performance underscores one of the great myths of the U.S. gasoline business. Consumers tend to believe that gasoline retailers prosper when street prices rise, and conversely empathize with station operators as prices decline.
But the inverse is generally true. Wholesale gasoline prices have a tendency to drop late in the late summer and early fall and some of that can be attributed to a shift in the gasoline formulation from low RVP summer grade gasoline to high RVP winter grade gasoline.
The step down in prices at least in the futures market has been quite substantial.
Over the past five years, the average spread going from September to October RBOB futures averaged a 16cts/gal step-down in prices. The drop in price from September futures to October futures though in the past two years has been in excess to 20cts/gal. Currently, the spread between the two months contracts has been running about 18-19cts/gal, still above average but 3-4cts softer than the previous two years.
The excessive spread between the end of the 3rd quarter and start of the 4th quarter contacts in 2022 and 2023 are largely explained by the relatively low gasoline supplies compared to previous years.
It is not just in the futures markets, but also in spot markets where some of the higher RVPs begin to become the tradeable spec sometime in mid-September (depending on the market).
For example, in 2022 the higher RVP RBOB in the New York Harbor ushered in about an 8cts. In 2022, however, from September 15 to 18, 2023, spot prices dropped by 21cts. That was quickly reflected in Northeast gross rack-to-retail margins which, on September 15, were 31.4cts/gal, but just six days later the gross margin had grown by nearly 70% to 52.8cts/gal.
Sometimes market circumstances demand government action. California does not see the transition to high RVP gasoline until late October. But in each of the past two years because of refinery downtime and other markets no longer making low RVP gasoline that would meet California specifications making resupply difficult, action was taken to relax RVP standards are few weeks before normal.
In 2023, L.A. CARBOB was pricing almost $1.50/gal over futures and San Francisco about $1.10 on September 28, 2023, but after the RVP waiver was issued, premiums fell by almost $1 in L.A. gross margins in California reacted swiftly more than doubling from 58cts/gal on September 28th to $1.69/gal just a few days later.
2023 was just “deja vu all over again” when compared to 2022. On October 3, 2022, L.A and San Francisco gasoline were pricing at more than $2 over futures, but two days later after the government stepped in, waiving RVP requirements, the market saw about $1.50 cut off those premiums to around 50cts over futures. Rack to retail margins, you guessed it, nearly tripled over the course of five days from 43.6cts/gal on October 1 to $1.54/gal on October 6, 2023.
Those are just a few examples how the fall RVP shift can have a massive impact on gross margins and further evidence that the best time of year for the gross rack-to-retail margin usually lands in the last third of the year.
Fun fact of the day: refiners, generally speaking, don’t make gasoline.
Drivers may think that crude oil goes into a refinery and gasoline comes out.
That’s only partially correct. Think of making gasoline as making a cake. There’s flour, eggs, milk, and oil in a cake recipe. Gasoline is similar in that it has multiple components that make up the gasoline recipe. At the end of that recipe you have two types of almost finished gasoline called Conventional Blendstock for Oxygenate Blending and Reformulated Blendstock for Oxygenate Blending.
To these blendstocks other liquids are added to make the substances that fuel our carpools, take us to grocery stores and get our families to their summer vacations. And, mostly, that final mixology does not happen at the refinery level.
The Mixers: CBOB and RBOB
To reiterate, most of the gasoline produced by refineries is actually unfinished gasoline or gasoline blendstock.
Blendstocks are blended with other liquids, such as ethanol, to make finished gasoline.
Most of the finished gasoline in the US contains 10% ethanol.
The blendstocks are a mix of components such as butane, reformate and FCC gasoline, which can be combined in different ways to reach needed specifications.
Conventional Blendstock for Oxygenate Blending (CBOB) is a blendstock that’s combined with ethanol to get E10 gasoline.
Reformulated Blendstock for Oxygenate Blending (RBOB) becomes reformulated gasoline (or RFG) after blending with ethanol.
What’s the Difference Between RBOB and CBOB?
Reformulated gasoline is required in certain areas to reduce smog per Clean Air Act amendments. RFG is required in cities with high smog levels and is optional elsewhere. RFG is currently used in 17 states and the District of Columbia. About 25 percent of gasoline sold in the US is reformulated.
Many of the RFG areas are in the mid-Atlantic and Northeast. So, OPIS spot market editors see a lot more Reformulated Blendstock for Oxygenate Blending (RBOB) trading in the New York Harbor region.
In the Gulf Coast spot market, Conventional Blendstock for Oxygenate Blending (CBOB) tends to be the most liquid product because there are fewer areas requiring RFG in that region.
Where Does Ethanol Enter the Picture?
Ethanol is like the icing on that cake made from gasoline. (Eww. Please don’t eat it.)
The use of ethanol is largely linked to the advent of the Renewable Fuel Standard (RFS) program, which Congress enacted to reduce greenhouse gas emissions, expand the US renewable fuels sector, and diminish US reliance on imports.
Ethanol isn’t blended into gasoline blendstock at the refineries, largely because ethanol can’t be transported through pipelines. It would damage them. Strong stuff!
Instead, ethanol is most often blended in at the rack, closer to its ultimate destination. That’s why you’ll often see ethanol listed along with gasoline and diesel in rack prices.
Ethanol serves to boost octane levels in gasoline, which can be helpful. But it also raises Reid Vapor Pressure (RVP), which can be tricky.
RVP measures the volatility in gasoline and is subject to seasonal mandates. So, blending ethanol can be complicated during summer months, when people are looking for lower-RVP gasoline.
Sometimes, detergents or other additives are blended into gasoline before it hits retail stations—those additives are a way that fuel brands differentiate themselves with customers.
Happy baking!
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.
As the weather warms up with summer on the horizon, US gasoline prices will likely follow the season’s temperatures and start the cyclical rise as well.
Why does gasoline typically cost more in warmer weather months?
One of the biggest reasons for the price change is RVP, or Reid Vapor Pressure. It’s a measure of gasoline volatility. For those technically inclined: the number is the absolute vapor pressure of a liquid (in this case gasoline) at 100°F (37.8°C) as determined by the Reid method. In layman’s terms, it’s the ability of gasoline to vaporize so it can be used in your car’s engine – which changes with the outside air temperature.
That seasonality is a big part of the reason gasoline gets more expensive as temperatures increase. The lower the RVP, or the lower the volatility, the more expensive it is to make on-road gasoline. The summer months, when ambient temperatures are higher and gasoline evaporates quicker, require a lower pressure. In colder temperatures, gasoline with a higher RVP is preferred for winter driving.
Apart from car performance needs, the US Environmental Protection Agency, or EPA, sets standards for summer RVP levels to reduce emissions from evaporating gasoline, which can contribute to smog.
Part of understanding RVP is understanding how gasoline is made.
Gasoline isn’t just refined and ready to be put into your car’s gas tank. It must be blended with multiple components to make something that is able to be used on the road – like baking a cake with many different ingredients. And all those ingredients – or blending components in the gasoline-making world – must add up to a final product that you can put in your car, meeting all the specifications that make sure it’s up to snuff. And all those components affect the final product in different ways.
For example, take butane – a popular component for blending gasoline in wintertime. Butane is an inexpensive way to increase the octane (which means the resistance to knocking or uncontrolled ignition within a car’s engine) in your blend of gasoline. However, butane also increases the RVP level, so it is mainly used in the winter months, when RVP specifications are high.
So how does this affect the cost of gasoline, from the retail station to the wholesale racks to the big bulk gasoline markets?
Those less expensive (and sometimes more plentiful) blending components like butane, which can be used during cooler weather, help to keep the price of gasoline down at the pump. But as the weather gets warmer, some of those components aren’t going to be able to be used and more expensive options will have to be utilized.
Typically, consumers start to see prices head higher in the spring and early summer as blends make their way to the pump gradually as the weather warms – with timing that can vary by region. The change at your local gas station can depend on several factors besides the change in RVP, like local margins, competitive factors, etc.
But upstream, those changes start much sooner than they do in the retail sector. In the rack markets, where marketers go to load up their fuel trucks, usually the specification shift happens in spring as markets across the country start to supply the lower RVPs (LRVP). In 2024, OPIS Rack Reports will start to reflect LRVP starting as early as April 1 and continue through September 15 for most areas. The EPA mandates that terminals are fully switched over to summer-spec fuels by May 1, but refiners often start the process earlier.
Every city in the US is required to switch to a 9.0-lb. RVP gasoline in the summertime, with several areas across the country requiring even lower (and more expensive) RVPs. For example, the Sparks/Reno rack in Nevada will only show 7.8-lb. RVP products and the Detroit, Michigan, rack will only show 7.0-lb. RVP material.
Even further upstream from the rack markets, in spot markets, where large volumes of incremental material change hands (i.e. trades of 5,000 – 25,000 bbl or more), the RVP shift takes place even sooner.
As of March 1, 2024, California CARBOB gasoline has already moved to a 5.99-lb. RVP gasoline for the summer. East of the Rockies, Group 3 is showing an 8.5-lb. RVP specification, while Gulf Coast markets are showing a transitional, 11.5-lb. RVP grade product to help downstream customers blend tanks to lower RVPs but will see summer-spec gasoline appear in early March. Chicago and New York Harbor markets are still showing a winter-grade, 13.5-lb. RVP, summer grades of gasoline making their appearance later in March.
RVP transitions play a large role in the changing price of gasoline, as regulations must be met to have viable gasoline product for use at the pump. But there are a myriad of other factors that can mitigate or exacerbate any of those changes – including geopolitical influences, price movement of futures contracts, weather events, regional supply disruptions and refinery issues, to name just a few.
OPIS provides several tools to help keep abreast of the changing prices and regulations, such as the OPIS Spot Ticker, spot market reports, rack reports and retail data, as well as alerts for breaking news that can influence the price of gasoline.
An updated report for 2022 on the top retail gasoline and diesel chains in the country showed surprising results. Here are some highlights.
Prices and cracks for diesel and other oil products surged in late July and early August, reflecting tight supply and low stocks at a time when demand picks up due to the summer travel season.
If you are reading this, chances are good that you have recently started subscribing to one of our rack services or are interested in doing so.
California this year added a new layer of compliance costs under its Low Carbon Fuel Standard (LCFS) program, forcing so-called obligated parties – refiners and fuel suppliers – to scramble to adapt.
Thanks to irrational exuberance on the part of oil speculators in the spring of 2022, comparisons for key fuels in the U.S. are now spectacularly striking.
OPIS customer service super sleuth Regina Flake barely had time to put down her coffee when the call came in early Saturday morning….