Excerpted from This Week in Petroleum
Release date: May 15, 2019
On May 6, 2019, the California retail gasoline price averaged $4.01 per gallon (gal) and the West Coast retail gasoline price averaged $3.71/gal. In comparison, the U.S. retail gasoline price averaged significantly lower at $2.90/gal. Gasoline prices have not neared the $4/gal price in California since the high crude oil prices in 2014 and the Torrance refinery outage in 2015 (Figure 1). Gasoline prices dropped slightly on May 13, 2019, with California prices averaging $3.97/gal. Since the beginning of 2019, the price of gasoline on the West Coast has increased by $0.68/gal and the price of gasoline in California increased by $0.79/gal. Over the same period, the price of Brent crude oil, the primary driver of U.S. gasoline prices, only increased by $0.40/gal. Reduced refinery production of gasoline due to planned and unplanned outages and declining gasoline inventories in a region with limited and expensive resupply options have contributed to the sharp increase in West Coast retail gasoline prices.
California gasoline prices last neared $4.00/gal in 2015 following an explosion and fire at ExxonMobil’s Torrance, California refinery, which produces between 15% and 20% of Southern California’s gasoline supply. After this incident, gasoline prices quickly rose, reaching a high of $3.90/gal in July 2015. However, relatively low Brent crude oil prices of $1.36/gal, or $57 per barrel (b), mitigated the price increase that resulted from the Torrance refinery outage. In 2014, California gasoline prices reached $4.25/gal in late April, largely as the result of the high crude oil prices, with Brent crude oil reaching $2.60/gal ($109/b). The current California gasoline price increases are the result of rising crude oil prices and refinery outages.
Beginning in March 2019, West Coast gross refinery inputs (four-week rolling average) began to rapidly decline, falling from 2.6 million barrels per day (b/d) for the week ending March 15, 72,000 b/d (3%) higher than the five-year (2014–2018) average, to 2.4 million b/d for the week ending April 19, 233,000 b/d (9%) lower than the five-year average (Figure 2). Both planned and unplanned refinery outages have decreased the available gasoline supply in a market with a tight supply-demand balance, but weekly refinery runs have increased since reaching an annual low on April 12, which may indicated that refineries in the region are coming back online.
According to trade press reports, unplanned outages in the West Coast region include a shutdown in March as a result of emissions issues at a Valero refinery in Benicia, California, and shutdowns in March and in May as a result of two separate fires at a Phillips 66 refinery in Carson, California. Planned maintenance at Marathon Petroleum’s Los Angeles refinery and BP’s Cherry Point refinery and additional planned and unplanned outages in the region also contributed to the market tightness on the West Coast. Trade press reports indicate Valero’s Benicia refinery should resume normal operations in the next few weeks, and the planned maintenance at Marathon’s Los Angeles refinery is nearly complete.
Planned refinery outages typically do not drive large price increases. Refineries prepare ahead of outages to ensure adequate inventories and alternative sources of supplies are available. However, unplanned refinery outages can result in large price increases, especially when they occur at the same time as planned outages in a tightly balanced market.
The 2015 Torrance refinery outage is an example of an unplanned outage causing a large price increase. This outage and the ensuing market tightness were responsible for retail gasoline prices in California increasing by more than $1.00/gal above the U.S. average gasoline price. Since the Torrance refinery outage, the difference between the price of gasoline in California compared with the rest of the country remained lower than $1.00/gal until the recent California gasoline price increases (Figure 3).
The West Coast is isolated by both geography and a lack of petroleum infrastructure connections to the rest of the United States. In addition, California requires a different gasoline specification than the rest of the country, further narrowing resupply options. These restrictions mean that after drawing down in-region inventories, the next available resupply is through imports from refineries in Asia or Europe. For the week of May 3, 2019, the four-week rolling average of West Coast imports of total gasoline reached 120,000 b/d, the highest level since EIA began tracking this data in May 2008. West Coast imports fell the week of May 10 to 102,000 b/d. This method of resupply is costly and wholesale prices in the region have increased to cover these associated costs.
The wholesale prices of California reformulated blendstock for oxygenate blending, the California-specific gasoline specification, in Los Angeles and San Francisco were $0.22/gal more and $0.20/gal more, respectively, than the benchmark gasoline price of NYMEX reformulated blendstock for oxygenate blending as of May 13. These price differentials are down from the highs seen in early-to-mid April of $0.62/gal and $0.60/gal for Los Angeles and San Francisco, respectively. The price spread declines may be a signal that refinery operations are beginning to come back online.