Don't look for a repeat of last year's spectacularly profitable finish for U.S. gasoline retailers. A confluence of events may conspire to keep wholesale costs inflated against the backdrop of a flat retail market.
 
With 100 days to go until 2020 concludes, OPIS looked at gasoline futures, spot prices and motor fuel margins through the last decade. Three of the last five years have seen very large drops in wholesale costs that have fueled "big innings" in retail margins. In 2014, a November/December global collapse in prices pushed wholesale motor fuel costs down $1.15-$1.38/gal, punishing oil producers but rewarding retailers with then-record margins. Markets in 2015, 2016 and 2017 saw choppy wholesale costs, but volumes were pumped up by generally cheap gas and a rapidly recovering U.S. economy.
 
Last year delivered the perfect environment for motor fuel retailers as spot gasoline prices descended 69-76cts gal from entry to exit into the last 100 days of 2018. Many markets saw street prices match only 50%-75% of the cost
declines, and pump prices had a particularly slow pace of descent until winter's commencement.
 
For publicly traded gasoline retailers like Casey's, Couche-Tard and Murphy USA, the next 100 days promise to deliver year-on-year "comps" that almost certainly will look ugly. Big Box chains such as Costco and BJ's may also be victimized by less flattering contributions from fuel to earnings, although they tend to avoid giving granular information on fuel profits.
 
Incredibly, every one of the last five years has seen U.S. retailer margins increase in the last 100 days of those years, when measured on an entry-to-exit basis. The biggest beneficiaries have tended to be in New England, Rocky
Mountains and West Coast regions, but last year saw virtually every state see substantial margin enhancement.
 
But the most key component of renaissance months for fuel profitability is a slide in wholesale gasoline costs. With 100 days left in 2019, the price of gasoline could still falter. But a significant plunge might require confirmation of the signals that precede a global recession, or an ascent of the perceived macro risk of an all-out trade war that might slow global growth.
 
Such elements might indeed lower the price of wholesale gasoline but would be accompanied by less driving and less-inside-the-store spending from consumers.
 
Here's why the remainder of 2019 looks to be different from the last 100 days of 2018 in oil and gasoline:
 
  • Some 10 days after the Houthi attacks on the Saudi oil processing plant at Abqaiq, there have been many purchases of merchant gasoline by Aramco or from joint ventures that feature an active Saudi interest. Those purchases have tightened gasoline availability in Singapore, Europe and bulk markets bordering the Pacific Ocean. The sharp drop in Saudi refinery runs may not manifest itself in crude oil prices, but instead may prop up refined products.

  • Among big bulk markets, only New York Harbor -- the seat of the NYMEX RBOB contract -- is still judged to be on the "sloppy" side. But there are no contributions this year from the shuttered Philadelphia Energy Solutions refinery, and recent subpar import figures of about 500,000 b/d may continue. One cargo trader told OPIS that some weeks may see foreign gasoline arrivals only from Canada.

  • Exports look stable. Central and South American ports that got used to merchant gasoline and components from Singapore or South Korea may see far fewer vessels making it to the Western Hemisphere.

  • Refiners are still motivated to tilt yields toward more distillate and less gasoline, particularly in the fourth quarter. NYMEX diesel yields a refinery margin more than $15/bbl above RBOB.

  • IMO 2020 may affect refinery operations in about 50 days. If vacuum gasoil (VGO) continues to fetch a strong premium to some crude oil blends, those barrels will bypass fluid catcrackers and go straight to the marine market, crimping U.S. production of gasoline. Six out of the last eight weeks of 2018 saw adjusted gasoline production top 10 million b/d. Production was measured last week at less than 9.5 million b/d in what may be a sign of what's to come.

  • Once 2020 starts, there will be far less leniency on gasoline's sulfur content. Tier 3 standards that take effect Jan. 1 will mandate that refiners, blenders and importers average 10 ppm sulfur for 2020, and not exceed 80 ppm, even if they have acquired expensive sulfur credits. Temporary interruptions of desulfurizing equipment may have more dire consequences next winter.
 
Add turnarounds and the usual assortment of power outages, equipment malfunctions and refinery "events" to the calculus, and it's easy to see why 2019 does not look to end with a tailspin for gasoline prices.
 
--Tom Kloza, tkloza@opisnet.com

Copyright, Oil Price Information Service