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, retail gasoline 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 wholesale gasoline prices. 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 retail gasoline 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 retail gasoline 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 a 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 for gasoline retailers 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.