To help with that first question, let's take a look at spot gasoline prices in Los Angeles, using data from OPIS. The spot market is where physical gasoline is first traded as it leaves the supply source. Typical parcel sizes are twenty five thousand barrels (about 1.2 million gallons.) There are actually three spot gasoline markets on the West Coast - San Francisco Bay, the Pacific Northwest and Los Angeles - but the LA market is the most liquid of the three. In the nearby graph, we plot the difference between spot LA gasoline and the New York Mercantile Exchange (NYMEX) gasoline for YTD 2012. The NYMEX gauges the near month of the futures market. Both the NYMEX and spot prices react to crude oil price changes, but in this analysis the spread is used to look at the change in gasoline price that is not directly related to the change in crude oil price.
Normally one would expect that the LA spot market would average 15 cents per gallon over the NYMEX because 15 cpg is the cost to move gasoline to the West Coast from the nearest resupply points on the US Gulf Coast. As you can see, the spread made a strong 30 cpg move up in February. This move is typical for late winter when the California market transitions from easy-to-make winter gasoline to harder-to-make summer gasoline and when a number of refineries are offline for maintenance ahead of the summer driving season. The 30 cpg includes the additional cost to manufacture summer gasoline and the impact of tightened gasoline supply. The gasoline traded on the NYMEX makes the transition to summer gasoline in late April and early May.
By early March, prices started to crash, dropping 50 cpg, as the transition to summer gasoline was completed and refiners finished their maintenance. Also, the impact of additional supply to the market was felt by the flow of gasoline from Salt Lake City on Holly Frontier’s new pipeline to Las Vegas. Since the Salt Lake City refineries have cheaper crude oil than the LA refineries, the price of their gasoline was better and the LA refiners lost market share in Sin City. This backed gasoline into LA and the spot price collapsed to well-under the NYMEX.
Refiners reacted to the oversupply in Los Angeles by looking for opportunities to export cargoes of gasoline. Our weekly analysis of production and stocks for California for April 20th revealed a large stock draw but no real change in production. To verify the stats, we talked with market participants who confirmed that cargoes had indeed been loaded for export to Mexico and South America.
By mid-April, LA spot prices were back above NYMEX prices as gasoline exports stabilized supply and buoyed prices. By early May, however, Los Angeles prices had really taken off and were 75 cpg above the NYMEX, primarily on a host of refining problems. These problems were well reported in the media and included unplanned shutdowns at Chevron Richmond and Tesoro Golden Eagle in the Bay Area, and Chevron El Segundo in the LA Basin. Probably the most significant was the failure of BP’s Cherry Point refinery to come back on line as scheduled.
The spread peaked around May 10th and dropped 35 cpg by May 16 as the short supply was covered by gasoline sellers.
We wondered how big an impact the cargo exports had on the price run up. We looked at stocks in California and stocks for PADD 5 (the West Coast as a whole). Stocks for the whole region hit very low levels this week (25.3 million barrels), but stocks in California are not remarkably low. Evidently the real stock shortage has been in the Pacific Northwest, likely due to the Bay Area refineries and Cherry Point being offline.
So, back to those questions:
Q: Why is gasoline in California so expensive?
A: The gasoline price run up in the past couple of weeks was mostly due to unplanned refinery outages.
Q: Are we going to $5.00?
A: We don’t think so because crude oil markets are softening, gasoline demand is weak, and cheap gasoline from the Rockies is finding its way to the West Coast markets.
Q: What is the price of gas going to do next?
A: We think retail gasoline prices have peaked and are on the way down - at least until another refinery hiccup restricts supply.