As the Fuels Outlook session kicked off April 15 at the NACS State of the Industry Summit, both prices and volatility were high for crude oil and the refined products produced from it. While that’s still the case, the good news is that the industry is actively trying to meet these challenges.
Denton Cinquegrana, chief oil analyst, OPIS, a Dow Jones Company, covered the fuels outlook from crude oil, then downstream to refining and refined products. Crude is the natural starting point because its price is the overwhelming factor in the ultimate price of a gallon of gasoline or diesel fuel.
There’s an estimated 5.8 million barrels a day of capacity that are going to be added globally through 2026.
Oil demand has recovered from the depressed levels seen during the pandemic, but production hasn’t kept up with the shift, Cinquegrana noted. And then there are the disruptions caused by Russia’s late February invasion of Ukraine.
Domestically, the rig count is rising to meet the opportunity presented by higher oil prices, but as Cinquegrana noted, “You can’t just snap your fingers and make it happen.” Canadian production has also increased significantly. OPEC promised monthly increases of 400,000 barrels per day of production, which is moderate but should assist in easing prices if the goals are met. Also, while Russia faces oil sanctions, it is still finding markets for its oil, which is easing the global supply crunch.
However, there are some headwinds buffeting the increase in domestic production. One factor is that the shareholders for the producers want to see some return on their investments. Cinquegrana expects the crude market to settle out at somewhere between $90 a barrel and $140 a barrel over the summer as increased production gradually comes online.
REFINING CAPACITY
On the refining front, Cinquegrana stated that “profitability looks strong.” There will be tightness and short supply in some regions, with some of that being driven by shifts at refiners to renewable diesel. The East Coast, Gulf and Europe have experienced refinery closures as well, though a large new refinery under construction in Nigeria promises to cover some of the shortfall with even more capacity looming on the horizon. “There’s an estimated 5.8 million barrels a day of capacity that are going to be added globally through 2026,” Cinquegrana said. Refineries in the U.S. will be running at high utilization rates throughout the year.
Which brings us to expectations for refined products over the summer and throughout 2022. Retail prices have already hit record highs, and it is going to be a bumpy ride moving forward. “Even before the Russian invasion, we had expected a wild second quarter,” said Cinquegrana. “Markets have become incredibly volatile, and disconnects have emerged in the spot markets.”
The East Coast and West Coast will be the most susceptible to the disconnects, most likely related to diesel. He noted that gasoline inventories heading into the summer driving season are either close to or below seasonal norms. Imports of gasoline and components are not expected with much consistency.
Gasoline inventories heading into the summer driving season are either close to or below seasonal norms.
U.S. releases from the Strategic Petroleum Reserve as well as state gas tax holidays could help offset fuel prices for consumers, but their long-term effectiveness remains to be determined. What’s more, hurricane season has yet to arrive, with the uncertainties it brings.
Supply chain issues continue to impact the industry, along with labor shortages, particularly in trucking. Illustrating the severity of the situation, Walmart is offering drivers $95,000-$105,000 salaries with another $10,000 on top of that in California.
MARGINS AND PROFITABILITY
OPIS data show rack-to-retail margins were $0.341 in the first quarter compared to $0.207 in pre-pandemic 2019.
Excessive volatility began to take off in late February (with the invasion of Ukraine) and was ongoing as the SOI Summit took place.
Volume has not quite returned to pre-pandemic levels, and questions remain over the long-term impact of things like how the rise in telecommuting will play out moving forward. The average retail volume stood at 69,483 gallons in the first quarter of 2022, compared with 85,921 gallons in the first quarter of 2019.
The OPIS average monthly profit per site in gasoline sales was $23,694 in the first quarter of 2022, compared with $17,786 in the first quarter of 2019. For the prime pandemic years, it peaked at $30,999 in the first quarter of 2020 but cratered to $16,616 in the first quarter of 2021. Retail margin is up 64.7% compared with 2019, while volume is currently 19.1% below that seen in the first quarter of 2019.
As a low-price leader, Costco is pricing nearly $0.30 less than the local competition, keeping with its hypermarket fuel philosophy. Customers are waiting in lines sometimes for 30 minutes or more to fill up their tanks.
The average retail volume stood at 69,483 gallons in the first quarter of 2022, compared with 85,921 gallons in the first quarter of 2019.
Meanwhile, Cinquegrana said, “For all the talk of EVs, CAFE standards will have the most profound impact on gasoline demand in the near future.” The National Highway Traffic Safety Administration finalized Corporate Average Fuel Economy standards in March. The standards require an industry-wide fleet average of about 49 miles per gallon for passenger cars and light trucks in model year 2026.
Cinquegrana noted that rising wages make $4 per gallon in 2022 very different than $4 per gallon in 2008, when we previously saw such high prices. He expects E15 to gain some traction this year, as the major brands are becoming more receptive to the product. And global shortages may keep refiners in a “max diesel” mode.