Analysis: US West Coast Market Fundamentals Behind Spot Gasoline Price Surge

U.S. West Coast fuel market fundamentals in September combined in a unique way to push spot market differentials for California blendstock to one record high after another, sending retail prices in the state up by 10cts to 15cts/gal on a daily basis.

Retail gasoline prices in California averaged $6.18/gal Sept. 29, according to the Automobile Club of Southern California’s Weekend Gas Watch. That’s up 66cts week to week and $2/gal above where they were at the same time last year.

At the spot market level, prices for Los Angeles CARBOB were $4.85/gal Sept. 29, up from $3.96/gal on Sept. 22, according to OPIS data.

San Francisco CARBOB prices were also about $4.85/gal Sept. 29, compared with $4.43/gal on Sept. 22. Spot market premiums to the NYMEX November RBOB contract were assessed at $2.45/gal, up 45cts versus Sept. 22, according to OPIS data.

The West Coast refined products market is frequently referred to as an “island” and the latest round of price increases has illustrated just how true that is.

And refiner consolidation over the years has decreased the number of participants in the spot market, leading to lower liquidity and higher price volatility.

California now has 15 operating refineries, down from 21 in 2008. In addition, there is limited pipeline supply from east of the Rockies, limited production and supply within the region and imports can take weeks to arrive.

The West Coast (PADD 5) also has existing supply commitments to Canada, Mexico and countries within Latin America, and California is a key supplier to neighboring states such as Nevada and Arizona. Finished motor gasoline exports peaked at about 21.4 million bbl in 2018 and fell to about 15.6 million bbl in 2021, according to Energy Information Administration data.

Ahead of the recent price spike, West Coast refined products traders told OPIS that refiners were incentivized to skew output toward distillate because diesel prices rose sharply in the wake of Russia’s invasion of Ukraine. On April 28, for example, NYMEX ULSD futures settled at $5.1354/gal, while NYMEX RBOB futures closed at $3.5034/gal. That spread narrowed considerably in May, but ULSD continues to generally price above RBOB.

In addition, a forward pricing curve that favored prompt-month barrels discouraged spot market participants from holding inventory, refined products traders said.

Prompt-month Los Angeles CARBOB prices on June 3 were about 20cts/gal above next-month L.A. CARBOB, OPIS data showed. And prompt June-delivered CARBOB was valued almost 70cts above September-delivered barrels. By June 23, the spread between prompt June-delivered L.A. CARBOB and outer-month September-delivered barrels was at about 20cts/gal, according to OPIS data.

Gasoline imports into the West Coast virtually disappeared in late summer as the arbitrage closed. Over the same period, inventories continued to draw down.

PADD 5 gasoline stocks in the week ended Sept. 23 fell to a 10-year low for the second time in weeks to 24.92 million bbl, EIA reported on Sept. 28.

Total gasoline stocks for PADD 5 areas outside of California fell from 18.2 million bbl in the week ended July 15 to 14.5 mil bbl the week ended Sept. 23. California stocks over the same period fell to 10.44 million bbl from 13.29 million bbl.

Further, more of the region’s refiners have taken capacity offline for planned and unplanned maintenance, reducing run rates into the low 80s. By the time a record-setting heatwave hit California, sellers were hard to find, pushing cash differentials to one fresh high after another in Los Angeles and San Francisco CARBOB markets.

Planned maintenance started Sept. 20 at Valero’s 149,000-b/d refinery in Benicia, Calif. Valero in a notice said it is performing planned work on processing units as the company shuts some equipment inside the refinery.

Planned maintenance also is underway at the 147,000-b/d Phillips 66 Los Angeles refinery.

Marathon Petroleum in September began turnaround activity at the Carson section of its 382,000-b/d Los Angeles refinery, according to multiple trading sources.

Planned flaring was estimated to take place between Sept. 14-22 for “start-up/shut down” activity, according to a filing with the Flare Event Notification System.

OPIS earlier reported planned flaring was expected at the Carson section between Sept. 3-9 for “start-up/shut down.”

A trading source reported hearing of a power-related issue at Chevron’s 257,200-b/d Richmond, Calif., refinery in mid-September.

And OPIS earlier reported a planned turnaround underway at the 110,500-b/d Phillips 66 Ferndale, Wash., refinery.

West Coast refiner utilization rates were at 82.3% the week ended Sept. 23 and regional gasoline stocks fell to a 10-year low of 24.923 million bbl, according to the EIA. That marks the lowest level since 2012.

–Reporting by Bayan Raji, braji@opisnet.com and Max Tang, jtang@opisnet.com; Editing by Jeff Barber, jbarber@opisnet.com

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Tags: California, Gas & Diesel