US Gasoline Prices: Fear the Bactrian Camel

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.

Tags: Futures, Gas & Diesel