I’ll make this short. Rising gasoline prices will soon get front page attention in western time zones. Retail prices have mostly “crept” higher since late January, but some much more noticeable increases will soon occur in California, Oregon, Washington, Arizona, Nevada, and other states.
The increases are largely regional in scope, although I suspect that drivers in the Mountain, Central and Eastern Standard time zones will also see a substantial spike in the next 40 days. The catalyst is the temporary loss of a key southwestern refinery, and the loss underscores the fragile nature of U.S. fuel markets. The distribution challenge this decade conjures up the old “borrow from Peter to pay Paul” metaphor. In this case, Peter is California and Paul is west Texas, New Mexico, and Arizona.
Valero had a serious fire and explosion on Friday, February 6, and the incident knocked out a critical 158,000 b/d refinery until further notice. Damage assessments are still ongoing and the company has yet to establish a restart date for plant operations.
Raising Arizona . . .
The Valero refinery supplies western Texas but it also provides fuel that travels as far as Phoenix and Tucson via pipeline. It also furnishes product for Colorado and other states.
Today was the first business day since the incident, and wholesale prices moved sharply higher in the key California market. Some markets that normally get most of their supply via a pipeline that begins in El Paso and pumps to the west, may instead have to rely on product coming from California and moving east. We saw wholesale or spot prices for some grades of gasoline trade above $2.05 gal in California, and that’s up more than 50cts gal from where wholesale prices were just prior to the State of the Union address. Economics 101 teaches us that a 50cts gal wholesale increase translates into something similar at retail. You have been warned.
Arizona, which is always a trouble spot for smooth supply, may see some huge increases in the next few days. Retail prices in the state averaged $2.27 gal Tuesday evening, but replacement costs point to street prices some 25cts gal higher soon. Similarly, Nevada can’t hold on to street prices of just above $2.50 gal when replacement costs are well above that number.
Breakdown . . .
This has not been a smooth Winter for refining operations. U.S. refining is under much more scrutiny in 2007 than ever before, thanks mostly to the consequences that “events” can pose for investors in oil companies and oil futures, and the moves that the headlines can sponsor.
There is no statistical record that one can consult to determine whether fires, explosions, power outages, and other mishaps are more common this year, but that is certainly the perception in the trading community. And regardless of what the jaded man-on-the-street might think, U.S. refiners put safety on a well deserved pedestal beyond any other considerations.
McKee, Texas is a long way from most major metropolitan areas, but the region it serves doesn’t have access to imported gasoline or diesel. That’s why last weekend’s event might sneak up on financial traders who concentrate solely on oil futures’ contracts. Western markets, and indeed, some mid-continent markets, are marching to their own beat. Crude oil futures and gasoline futures fell today but the drop has little relevance to the supply balance in western and southwestern states.
Direct From Washington: Today’s Dose of Irony
Because of the wholesale price rises previously cited in this column, we will see California and other western states soon flirt with $2.75-$3.00 gal retail price levels. It has nothing to do with collusion, and everything to do with supply and demand fundamentals; speculative and investment money; and the tendency for prices to climb a wall of worry.
Ironically, a Government Accounting Office (GAO) report was released today and it concluded that California crude prices appear to be consistent with typical market trends. The report, issued to Sen. Dianne Feinstein (D-Calif.) and Rep. Henry Waxman (D-Calif.) noted some past separation between California produced heavy crudes and WTI grade, the NYMEX futures’ benchmark. The report looked at fluctuations that took place after various 21st century hurricanes and other events, and it didn’t rule out manipulation, but did conclude that prices are largely driven by supply & demand economics.
The price-surge-in-progress will no doubt result in another expensive inquiry down the road, you can be sure. But it’s not about the crude - - its about the dynamics for the finished products, and right now, there is the perception that supplies might not be comfortable when the first pitches of baseball Spring training are thrown. Time will tell whether that’s an accurate perception. History suggests that distribution will become smoother in the second quarter.
One final thought . . .
If I were a betting man, I’d wager that a disciplined statistical study would bear out what I’m about to declare based on experience and instinct alone; namely, the 40 days that follow the Presidents’ Day holiday represent one of the most hospitable periods for gasoline price appreciation each year. It isn’t a question of whether gasoline prices will move up between now and mid-April, it’s a matter of how much, and will those gains be sustained when this latest version of the “petronoia” rally has run its course.