Bending the rules of supply and demand

With all the air conditioners now in hibernation and the furnaces about to click on – ready to begin their trudge until April – we are now in the shoulder period of little requirement for cooling or heating. The same holds true for demand for gasoline since the driving frenzy is over, as well as distillates as the heating season has not yet begun. This lull is traditionally the time when refineries shut down for varying amounts of time to go into maintenance mode.  That is the time when they can re-tweak their operations to accept paraffinic profiled crude to produce a higher yield of distillates as opposed to naphthenic crudes, which when refined produce levels of gasoline needed for the high demand summer season. This maintenance period is normally from mid-September to the end of October and termed “planned” maintenance. This does not prevent refineries encountering more problems in which case the industry cleverly terms a shut down as “unplanned.”

Until this year, gasoline prices reached their lowest from mid-September to the middle of January. This again is because of low demand. Conversely, diesel prices increase during the period November to March – the heating oil season. In addition, as gasoline prices in Canada are fully dependent on pricing activity in the U.S., this is normally the time when the production of so called winter gasoline, with a high Reid Vapor Pressure (RVP), replaces summer formulations with a low RVP in the U.S., which some so called experts claim is cheaper to produce and prices at the pump should fall accordingly.

But this year the rules of supply and demand have been bent a bit. But why? Why aren’t rack, pump, and cardlock prices for gasoline and diesel doing what they are supposed to do at this time of year?

The answer is found in the price of crude. The refinery maintenance season has been delayed because the oil companies have been raking in record refining margins. The low crude costs relative to last year, and resultant low gasoline and diesel prices have increased demand. The low crude values have forced the hand of oil companies with upstream capabilities in that they have to subsidize the losses in exploration and production with the increased margins they are enjoying at the downstream level, which are diesel and gasoline rack and pump prices.

There is a danger here because these refineries have been operating at extremely high levels for an extended period of time – some say beyond design capabilities. Indeed we are beginning to see some cracks in dependability with unplanned shut downs of refineries in Indiana, Ohio and Delaware, all of which affect rack and pump prices in the U.S. Midwest and the Prairie provinces in Canada.

In Ontario, the Shell and Imperial refineries in Sarnia are in planned shutdown mode, and in New Brunswick the Irving facility is out of commission until the middle of November. The big picture refinery situation alone means that consumers may see crude falling, but they will not see the benefits until supply comes back on stream.

Those are the controllable factors that explain this disconnect between crude and pump prices. If we add the speculative, uncontrollable ingredients into the pricing soup mix things get murky.

The closure of the Irving refinery, which is a key supplier of gasoline into the U.S. northeast market including New York, has meant that gasoline imports from Europe have increased to almost 1 million bpd. Now with hurricane Joaquin brewing, and targeting the east coast, speculators are jacking up the futures prices of not only gasoline but also diesel.

And trouble is also brewing with Blinky Putin who’s decided to bomb, we’re not sure who in Syria, which could threaten OPEC crude supply.

All this while President Obama prefers to polish his political fiddle so he won’t get burned.

~The Grouch


Roger McKnight

Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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