PETROLEUM WATCH September 16, 2011 Fossil Fuels Office Fuels and Transportation Division California Energy Commission

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1 PETROLEUM WATCH September 16, 2011 Fossil Fuels Office Fuels and Transportation Division California Energy Commission Summary As of September 14, retail regular-grade gasoline prices in California increased 21 cents to $3.94 per gallon. Retail diesel prices rose by 11 cents since last month to $4.07. California spot wholesale gasoline prices increased 13 cents from a month ago to $2.90 per gallon, an increase of 5 percent. Wholesale diesel prices rose 5 cents to $3.00, an increase of 2 percent. Refinery production and inventories of gasoline and gasoline blendstocks increased this past week, rising from relatively low levels in late August. Diesel production and inventories rose as well, after diesel production meeting California specifications declined by almost 33 percent and diesel inventories declined by almost 32 percent in August and early September. World crude oil prices are the primary factor driving recent fuel price changes. Alaska North Slope (ANS) crude oil prices rose to $ as of September 13, $10.98 more than last month possibly in response to a decrease in United States crude oil inventories and an International Energy Agency decision to halt the release of oil from strategic reserves. Comparisons of Diesel, Gasoline, and Crude Oil Price Changes Alaska North Slope and California retail gasoline and diesel prices all increased sharply from January to May Oil prices peaked at $2.98 per gallon, gasoline prices peaked at $4.26, and diesel prices peaked at $4.47 during the week of May 2, As of September 12, oil prices were $2.78 per gallon, gasoline prices were $3.94 per gallon, and diesel prices were $4.07 per gallon. Gasoline, diesel, and crude oil prices are now 64 cents, 56 cents, and 57 cents higher than the beginning of the year, respectively. Over the past week, gasoline and diesel prices have increased, breaking a declining trend over the previous three months. In the past week, Alaska North Slope crude oil prices also increased 19 cents. If this oil price increase is sustained, gasoline and diesel prices can be expected to increase further as this crude oil price increase is expected to lead to higher fuel prices. However, weakness in the economy remains a significant restraint on higher crude oil prices. 1

2 Retail Prices The average California retail price for regular-grade gasoline increased 21 cents from last month, rising to $3.94 per gallon, and is 92 cents higher than this time last year. 1 Average U.S. retail gasoline prices have also increased, rising by just 6 cents from a month ago to $3.66. Average U.S. gasoline prices are 94 cents more than this time last year. The difference between California and U.S. retail gasoline prices increased by 15 cents since last month to 28 cents per gallon. Retail prices rose for the Labor Day holiday, contributing to the rise in prices seen during the past month. The premium for California gasoline more than doubled, from 13 to 28 cents. This returned prices to a normal spread and is at least partially due to minor refinery issues in California and a decline in such problems in the Midwest. Regular-Grade Gasoline Retail Prices State Average vs. National Average Dollars per Gallon California 1-Jan-09 1-Mar-09 1-May-09 1-Jul-09 1-Sep-09 1-Nov-09 1-Jan-10 1-Mar-10 1-May-10 1-Jul-10 1-Sep-10 1-Nov-10 1-Jan-11 1-Mar-11 1-May-11 1-Jul-11 1-Sep-11 U.S. 2

3 Typically, retail gasoline prices for California increase between February and late spring or early summer, due to the transition to summer blend gasoline and the beginning of the summer driving season. This year prices increased by about 95 cents per gallon between January 1 and early May, before the recent decline ended the rising trend in prices that began in January Since late June prices have leveled off, remaining between $3.73 and $3.94 per gallon Weekly California Retail Gasoline Prices Dollars per Gallon Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct Nov 1-Dec The average California retail diesel price increased 1 penny since last week to $4.07 per gallon. Diesel prices are 11 cents higher than last month and 93 cents higher than this time last year. U.S. retail diesel also changed little, decreasing 1 penny since last week to $3.86 per gallon. U.S. prices are 3 cents higher than last month and 92 cents higher than a year ago. Although the downward trend since May remains, California prices rose over the past month due to minor unplanned refinery issues. 3

4 Diesel Retail Prices State Average vs. National Average Dollars per Gallon California U.S. 1-Jan-09 1-Mar-09 1-May-09 1-Jul-09 1-Sep-09 1-Nov-09 1-Jan-10 1-Mar-10 1-May-10 1-Jul-10 1-Sep-10 1-Nov-10 1-Jan-11 1-Mar-11 1-May-11 1-Jul-11 1-Sep-11 Wholesale Gasoline and Blendstock Prices on September 13 California spot wholesale gasoline prices for regular-grade reformulated blendstock for oxygenate blending (RBOB) rose to $2.90 per gallon, 13 cents more than a month ago and 79 cents more than the same time last year. 2 Prices in New York deceased to $2.85, 9 cents less than last month and 84 cents more than a year ago. Los Angeles spot prices recently rose to $3.23 on September 2 before dropping to their present level of $2.90. The recent rise in prices coincided with the Labor Day holiday, which traditionally is the last holiday of the summer driving season. After Labor Day, prices fell as the summer driving season ended. Supporting the increased prices compared to last month, there was also a decline in California gasoline production and inventories around the end of August. In the Petroleum Administration Defense District 5 (PADD 5), which includes California, there have been declines in gasoline inventories as well. California average spot wholesale ultra-low-sulfur diesel prices stood at $3.00, a decrease of 8 cents from last week but 5 cents higher than last month. Like gasoline prices, diesel prices have fluctuated in August and September, rising to $3.12 on September 7 before falling to their current price of $3.00. Minor unplanned refinery issues at several facilities in California have contributed to higher gasoline and diesel prices. California average spot wholesale prices for fuel ethanol rose 7 cents from last month to $2.57 per gallon, following gasoline price increases. 3 A July heat wave caused reduced corn yield estimates and led to a spike in ethanol prices. Since this spike, ethanol prices relative to gasoline prices have decreased although remaining higher compared to year-ago levels. 4

5 The Energy Information Administration s (EIA) weekly report for the week ending September 9 shows that U.S. gasoline consumption decreased 1.2 percent, and distillate consumption decreased 5.1 percent from the previous week. The four-week average demand for gasoline is 9 million barrels per day, a decrease of 1.7 percent from last month and 2.7 percent from the fourweek average the same time last year. The four-week average for U.S. distillate demand is 3.9 million barrels per day, 3.3 percent more than last month and 0.8 percent more than the same period last year. The end of the summer driving season has pulled gasoline consumption downward while increasing factory output, driven largely by increases in automobile production, has increased diesel demand. 5

6 Futures-Spot Market Spread A higher spread between the state s spot fuel prices and the New York Mercantile Exchange (NYMEX) futures price indicates supplies are tighter in California, and a lower spread indicates the market is relatively well-supplied compared to the rest of the country. The NYMEX futures price reflects the national market, while California Reformulated Gasoline Blendstock for Oxygenate Blending (CARBOB) is a gasoline blend unique to California and is usually sold at a premium to the NYMEX. The spot market for California gasoline, however, has been at a discount to the NYMEX onemonth-ahead futures price for most of the summer. Measured by the five-day moving average, this discount peaked in late July at 21 cents, which is unusual. A premium of 5 to 15 cents has been historically normal. Throughout August and into the first week of September, this discount rapidly diminished and returned to a premium on August 19. The premium reached a peak of 27 cents on September 7 and has since declined to 17 cents. This indicates a significant tightening of the California spot market relative to the NYMEX futures price due to fluctuations in the wholesale spot price for CARBOB. These are caused by the declines in California production and inventories discussed in the Wholesale Gasoline and Blendstock Prices section. 50 CARBOB NYMEX Differential Cents per Gallon, 5 Day Moving Average CARBOB Spot Price Less NYMEX Month Ahead Price Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 11 Measured by the five-day moving average, on May 12 the California diesel spot price reached a 22 cent premium to the NYMEX one-month-ahead heating oil futures price. This premium shrank and became a discount on July 27. The discount widened slightly to 5 cents by the second week in August. The discount then shrank and returned to a premium, which has increased to 8 cents as of September 13. While diesel production and inventories in California were low, the diesel premium rose but remains below its historical average of about 12 cents. Hurricane Irene and the Virginia earthquake seem to have had little effect on futures prices. 6

7 California Diesel Spot Price Less NYMEX Month Ahead Price Diesel NYMEX Heating Oil Differential Cents per Gallon, 5 Day Moving Average 01 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 11 Refinery Production and Inventories Reformulated gasoline production in California for the week ending September 9 increased 2.9 percent from the previous week to 6.8 million barrels, rising to near the top of the five-year range but 2.4 percent lower than last year. iv California reformulated gasoline inventories increased 10 percent from last week, while gasoline blendstock inventories decreased 2.9 percent. California s combined inventories of 7

8 reformulated gasoline and gasoline blendstocks increased 2.9 percent to 10.9 million barrels and remain near the bottom of the middle of the five-year range. For the United States, gasoline inventories as of September 9 increased to million barrels, 1.9 million barrels more than the previous week. Inventories increased by 727,000 barrels on the East Coast, 970,000 barrels on the Gulf Coast, and 600,000 barrels on the West Coast. California-compliant ultra-low-sulfur diesel fuel (CARB diesel) production 5 was 1.8 million barrels during the week ending on September 9, an increase of 4.1 percent from the previous week but still below the five-year range. From early August to early September, CARB diesel production declined 33 percent. However, during this time production of other diesel fuel, which cannot be used in California, increased by 15 percent. Considering both CARB and EPA diesel, production declined by 23 percent during the same period. 8

9 Inventories of CARB diesel in California increased 10.6 percent from the previous week to 2.4 million barrels. Following CARB diesel production with about a week lag, from mid-august to early September, inventories declined by 32 percent, prior to the latest week s increase. U.S. distillate inventories as of September 9 rose to million barrels, 1.7 million barrels more than the previous week. Inventories increased by 758,000 barrels on the Gulf Coast and 1.25 million barrels on the West Coast, and decreased by 1.02 million barrels on the East Coast. Crude Oil Prices and Associated Factors West Coast prices for Alaska North Slope (ANS) crude oil, a refinery feedstock for California, increased to $ per barrel as of September 13. Prices have risen $10.98 since the last Petroleum Watch and are $43.46 higher than a year ago. 6 ANS crude oil price changes are influenced by inventory levels, refinery demand, economic conditions, perceived risks to global supply such as unrest in the Middle East, and near-term price trends as indicated by the futures market for crude oil. Additionally, the International Energy Agency recently ended the release of oil from member countries strategic reserves in response to improved stability in Libya. The following table lists some of the factors contributing to recent changes in oil prices: 9

10 August 2011 September 2011 Change from previous Month ANS Crude Oil Price (U.S. Dollars/Barrel) $ $ Up 10.1% Europe Brent Crude Oil Price (U.S. Dollars/Barrel) $ $ Up 4.0% West Texas Intermediate, Cushing Oil Price (U.S. Dollars/Barrel) $87.58 $90.21 Up 3.0% U.S. Crude Oil Inventories (MM Barrels) Down 2.2% Dow Jones Industrial Average (Points) 11,410 11,106 Down 2.6% Employment Situation Report (Change in Thousands of Nonfarm Payroll Employment) 117,000 0 EURO STOXX 50 Price 2,162 2,037 Strategic Petroleum Reserve Release levels Unrest in Oil-Exporting Countries Investment Fund Movements Into and Out of Commodities Down 100% Down 5.7% Directional Contributing Factor Upward Downward Unchanged Disruption in Oil Exports Since January 2011, West Texas Intermediate Oil prices have diverged from the Brent and ANS crude oil contracts. West Texas Intermediate-Cushing futures traded at $90.21 per barrel as of September 13, $28.60 less than ANS crude oil. Increased oil production from Canada and the United States has increased U.S. oil inventories in Cushing, Oklahoma, a location from which oil transportation capacity has not kept up with production increases. Alaska North Slope oil has historically traded at a slight discount compared to Brent index prices. In the past week, however, this discount has become a premium. 10

11 U.S. commercial crude oil inventories as of September 9 fell by 6.7 million barrels from the previous week to 346 million barrels, continuing a declining trend over the past four months. Crude oil stocks are 11 million barrels less than this time last year but 18.7 million barrels more than the five-year average for this date. California crude oil stocks fell less than one percent from the previous week to 14.5 million barrels and are 11.9 percent less than last year. 1 Retail gasoline and diesel prices and U.S. crude oil and product inventory estimates are from the Energy Information Administration of the U.S. Department of Energy. 2 Since the Energy Information Administration is not currently publishing spot prices, the Energy Commission is using data from The Wall Street Journal s Market Data for spot wholesale prices. The Energy Commission will reconsider using the Energy Information Administration s wholesale spot gasoline and diesel prices if publication resumes. 3 Ethanol railcar prices are from Platts Oilgram and are average prices for prompt Southern California shipments minus a 45 /gal federal excise tax credit for 2009 prices and a 51 /gal federal excise tax credit for prices prior to California alkylate prices are also calculated from Platts Oilgram and include a 20 /gal transportation and distribution cost from Gulf Coast to California. Spot wholesale prices for regular-grade California reformulated gasoline blendstock for oxygenate blending (CARBOB) are from Oil Price Information Service. iv California refinery production and inventory information is from the Petroleum Industry Information Reporting Act (PIIRA) database maintained by the California Energy Commission. 5 Staff has discontinued the reporting of combined CARB and EPA diesel production and inventories and will report only CARB diesel as of December EPA diesel is primarily for export from California. 6 Alaska North Slope (ANS) crude oil prices are from The Wall Street Journal. Brent and West Texas Intermediate (WTI) crude oil prices are from the Energy Information Administration. 11