Significant Gasoline Price Inflation Likely In March Madness
We’ve used the “March Madness” sobriquet before, but not necessarily in recent cheap fuel years.
Get ready for gasoline prices to take flight. It’s a traditional rite of spring and may be hastened this year by more-than-your-garden-variety schedule of refinery maintenance and the United States’ new status as motor fuel supplier to much of the Western Hemisphere.
If the performance of the futures market matches the trajectory of 2016, street prices above $3/gallon could dot the country like spring thunderstorms.
OPIS has long held the expectation that January and February 2018 would see a calm backdrop for gas prices. Crude oil prices are valued at more than double what was seen at the bottom of the surplus oil cycle in 2016, but gasoline demand has become notoriously lumpy in recent years. Take last year, for example. Americans used only about 357 million gal per day in January 2017, but by June, those needs ascended to over 410 million gal of motor fuel.
Check out these highlights from our 2018 Outlook Forecast.
OPIS takes issue with Department of Energy measurements that imply winter gasoline demand is up 6% or so from last year. However, we don’t take issue with the notion that April through August will see much higher demand than in the last 60 days.
U.S. refiners were up to the task of manufacturing plenty of fuel, until Hurricane Harvey struck last summer and temporarily knocked out more than 20% of U.S. gasoline production. But the small price spike that followed Harvey’s landfall may be exceeded by the escalation that U.S. consumers see from March 1 to Cinco de Mayo. The spike might represent a “no bueno” for consumers and inflation hawks, but it may indeed deliver economic oomph to the U.S. refining industry.
Here are some contemporary observations that provide perspective as the days get longer and travelers deal with more hospitable weather and destination travel that supplements the “got-to-go” traffic that dominates January and February:
- Keep a sense of history. Wholesale gas prices, whether represented by the futures or spot markets, almost always rise in March. The November-February period is less a quest for a winter bottom and more of a search for the preseason launching pad. Most recent history suggests that gasoline rallies at the end of the first quarter and runs out of steam in the first 10 days of April.
- Variation in price spikes is considerable. In 2011, wholesale gas prices added 40-57cts/gal March 1 through April 10. In 2012, RBOB futures moved from $3/gal and approached $3.50/gal before always overzealous buyers realized that prices had overshot. 2013 was an outlier with a small increase of about 20cts/gal, and similarly scant gains were part of 2015. 2014 was a true outlier with barely any movement in high-priced gas.
- In 2016, we saw crude stumble to about $26/bbl, but that didn’t impede one of the largest-percentage increases in spring gasoline on record. A March/April rebound in crude helped gasoline swell by 40% in roughly 40 days. Last year saw a 15% gain March 1 through April 10, adding a modest 23-30cts/gal to wholesale costs.
- This year brings a clear X factor — namely, the growing export market for U.S.-produced gasoline. Gasoline exports last March were a solid 589,000 bbl per day. But this year, gasoline departures in March and even April may surpass 30 million bbl each month. That’s not unprecedented. We saw more than 33 million bbl go offshore in November 2017. Offshore refiners that historically supply Mexico, the Caribbean and South America haven’t upped their game since problems in late 2017 and look to be hamstrung by operational issues for most of the year.
- Refinery maintenance. A common myth is that refinery turnarounds allow for equipment to be tweaked so that gasoline production can be maximized while diesel production gets cut. The reality is that responsible refiners are always tweaking the yields of products they manufacture based on the crude that goes in and the price of the products that come out. This year has a heavier schedule of refinery maintenance than is typical, and some of the additional work comes thanks to projects that were deferred from post-Harvey to first-quarter 2018. OPIS believes that the maintenance cycle will peak in the March 20-April 10 period, just as most refiners are switching from winter to summer specifications. The late innings may, in effect, see the largest rallies.
- Inventories. High inventories toward the end of the first quarter can be like slow guys clogging up the bases in baseball. Inventories this year are about 10 million bbl behind those of last year, but the entire U.S. system operates on a severe just-in-time basis. That system works great when refiners are operating near maximum levels, but just-in-time can be just intolerable when large refineries are in maintenance.
- Follow the money. In previous months, all records for money flow into crude were broken, in part because of money managers being comfortable with a stake in higher commodity prices. Nothing propels money flow like a strong seasonal proclivity, so an already sloppy amount of funds parked in RBOB futures may get downright gelatinous in coming weeks. Prices will inevitably overshoot, but that area of excess may be 30-50cts/gal above current numbers.
So, what does this all mean for the U.S. economy, consumers and particularly for investors who already seem braced for inflation that will exceed anything in the last 10 years?
OPIS put pencil to paper and plugged in price targets for the population at large. A reasonable assumption is that gasoline demand in say April will be close to 9.3 million bbl per day, or nearly 391 million gal per day. Current prices of just under $2.52/gal would keep monthly costs below $1 billion per day.
But a more likely scenario is that national gas prices advance to, say, $2.79/gal nationally. Given demand trends, here’s how that would translate to April costs, compared with monthly totals in the last five years:
|Month Year||Gasoline Demand||Average Price||U.S. Total Cost|
|April 2018||9.300-million b/d||$2.79/gal||$32.69-Billion|
|April 2017||9.248-million b/d||$2.39/gal||$27.85-Billion|
|April 2016||9.176-million b/d||$2.10/gal||$24.28-Billion|
|April 2015||9.189-million b/d||$2.44/gal||$28.25-Billion|
|April 2014||8.955-million b/d||$3.64/gal|
A typical motorist, using about 60 gal per month of gasoline might pay $167.40 in April, compared with $126 in April 2016 and $143.40 in April 2017. But the cost would be considerably lower than the more than $218 in monthly fuel costs in 2014.
In other words, prices this driving season will be the most expensive since 2014, perhaps regardless of the extent of March Madness 2018. Compared with 2016, consumers will pay about $6 billion to $7 billion more in monthly fuel costs.
But prices are cheap when compared with what the $100/bbl crude years (2011-2014) produced earlier in the decade. Even a 28cts/gal increase from today’s numbers would yield costs that are 85cts/gal, or nearly $8 billion per month lower than four years ago.
There’s no better way to keep track of the volatile spring gasoline market — wherever your day takes you — than via our real-time Mobile Spot Ticker. Get prices, as they tick, on-the-go!