Unlike the rest of the normal world where there is winter, spring, summer, and fall, as I have mentioned previously, with stuttering regularity I might add (now there’s an oxymoron that even Rex Murphy would be proud of!), that the refining world has only two seasons – the driving season and the heating season.
At first glance this looks pretty simple. The first season is a high demand gasoline period while the latter refers to the high demand distillate timeframe. Logically, one would think that with schools all across North America closed for the summer, prices would be edging up as gasoline demand increases and inventories go the other way.
But there is no normal in the abnormal energy world, and this driving season is certainly abnormal.
The high gasoline demand we are seeing now is not a sudden thing, it is actually up by an average of 4% for the last eight months. I do not see this slowing down, especially when I look at car sales, which pale in comparison to the – they-all-look-the-same land yachts with the cleverly named descriptors – S U V, and “light” trucks, even though you need an escalator to get into the cab and never seem to even attempt to fit into a box store parking spot! The increase in sales of these less fuel efficient modes of transport are in response to lower pump prices, which in turn, are a result of lower crude prices thanks to the Saudi inspired market share war.
As it stands today, we are seeing pump prices continuing to fall despite higher demand, and this is because refiners are now reaching top cog on the production side with inventories now straining storage capabilities – the same holds true for crude inventories with virtually nowhere for it to go.
So we have an oversupply of crude and gasoline with refineries running red hot, but pump prices dropping.
This means that something has to give and this give will be at the refinery level.
Normally the snakes and ladders movements of daily crude oil determine gasoline pump prices. Time to change partners! And with gasoline inventories so high, it is retail gasoline prices that are determining crude prices; and since gasoline inventories are so high this lowers pump prices – and that is why crude oil prices have been dormant or stuck in the $47 to $49/bbl range.
With crude now not moving, this means the upstream profitability is stagnant so oil companies look to the downstream for help, but right now, it is not there because the crack spreads have narrowed to an alarming level due to low crude and rack prices.
The only way for the oil companies to solve this is to cut back on refining runs in order to restore their margins. But they may have left this too late because gasoline inventories are out of this world.
Be forewarned: the rip cord in the apparent free fall in gasoline prices can, and will be, pulled soon, but the consumer will not feel the effects until mid-to-late August.
Diesel consumers must also be forewarned: When refineries cut back on production, this will be before the traditional fall shutdown for seasonal maintenance so inventories will fall, and prices will increase in the normally low demand September/October timeframe.
We may well have a situation where crude prices stagnate but diesel prices propagate.
Enjoy the ride while you can, but with higher prices around the corner be careful passing on the bend.
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