A buzz phrase that you’ll hear many times if you watch business shows is “priced for perfection.” I’ve heard it several times in the last few days when equity analysts describe the price of Apple Computer stock in the wake of the I-Phone rollout.
Well, fuel prices since March have been “priced for imperfection.” That’s one of the reasons why you may see $75 bbl crude before you witness $3.00 gal or higher unleaded regular in your local fuel markets.
Today was an example of how quickly the trading mindset can change when prices already reflect the occasional calamity. That calamity arrived in the Great Plains this weekend via floods that knocked out a 108,000 barrel per day refinery in Coffeyville, Kansas. The pictures of the refinery and the homes in the adjacent town look very similar to the photos distributed in the wake of Hurricane Katrina. I’m not a refinery engineer, but it certainly looks as though the U.S. has lost at least the Summertime contribution of a key plant that supplies farmers and consumers in Kansas, Oklahoma, Nebraska, the Dakotas, and Minnesota. Some of those areas might see stiffer gasoline prices in coming weeks.
But incredibly, the rest of the country yawned as another large refinery went on the disabled list. Wholesale prices were flat in key markets on the West Coast, Gulf Coast, and East Coast and fear of supply tightness was replaced by worries about softer demand now that July is here. Markets always have a much more delicate psyche once the product is “in season” and that is certainly the case for Summer gasoline.
I suspect that the prices you witness on July 4th and into the weekend will be very similar to what you’ve seen in the last few days. Pump values have stabilized around $2.95 gal or less and that may be similar to what you’ll pay at month’s end.
A Compelling Scorecard
Quarterly prices can sometimes represent a fluke, rather than a trend, but six months of petroleum data gives a granular and panoramic view of the landscape. With that in mind, OPIS looked at the first half of 2007 for a little perspective.
The average gasoline price (unleaded regular) for January through June was $2.6736 gal. The second quarter saw a staggering 65cts gal increase, which appears to be the highest quarterly increment (for absolute values of fuel) ever. When compared to recent full years, this value was less than 12cts gal above the 2006 average of $2.5667 gal. The rest of the decade finds annual averages of $2.2654 gal in 2005; $1.8427 gal in 2004; $1.5587 gal in 2003; $1.3497 gal in 2002; $1.4397 gal in 2001; and $1.5008 gal in 2000. You may now wax nostalgic.
The average diesel price for the first six months of 2007 was $2.774 gal, which is a little more than a penny under the full year 2006 retail average of $2.7852 gal. The prices really tail off as one backs up in the decade with $2.4779 gal in 2005; $1.8611 gal in 2004; $1.5833 gal in 2003; $1.3746 gal in 2002; $1.4926 gal in 2001; and $1.5548 gal in 2000.
Ironically, crude oil was cheaper in the first half of 2007 than it was in the first half of 2006. The average price in the just completed six months was $61.68 bbl compared to $67.13 bbl last year (for WTI crude futures). We eventually reached $78.40 bbl in last year’s bull run, before collapsing in a downtrend that eventually took prices to $49.90 bbl in midwinter.
I emphasize that the relationship between the price of crude and the price of gasoline has undergone a severe transformation in recent years. Gasoline or diesel prices formerly had an orbit that was elliptical, but generally stayed within $10 bbl of the price of crude. Not any more. Several refining CEO’s presciently anointed this decade as the “refining renaissance” and the painting from that prosperous sector is much more celebratory than it was just three years ago.
Here’s a quick study in how refinery margins have swelled in just three years. OPIS took the wholesale ex tax price for gasoline and transportation diesel in key bulk markets, and then computed a margin versus crude (again, we used WTI futures). The data, representing the first six months of each year, sings thusly:
2007 2006 2005
WTI Crude $61.68 bbl $67.13 bbl $51.66 bbl
NY Unl Margin $20.94 bbl $12.72 bbl $ 9.40 bbl
NY HO Futures* $13.47 bbl $11.27 bbl $ 9.82 bbl
Gulf Coast Gas $19.13 bbl $12.98 bbl $ 7.31 bbl
Gulf Coast Diesel $19.78 bbl $15.52 bbl $10.27 bbl
Midwest Gas $23.48 bbl $13.55 bbl $ 8.79 bbl
Midwest Diesel $23.00 bbl $16.92 bbl $11.42 bbl
Calif. Gas $33.10 bbl $24.05 bbl $17.26 bbl
Calif. Diesel $25.50 bbl $22.39 bbl $16.04 bbl
Note: Critics of this quick analysis might suggest that I might be guilty of overstating fuel margins, especially given the fact that refiners have had to spend money to remove more sulfur from their gasoline and diesel in the last three years.
To that, I say yes, refiners did incur expenses for desulfurization and other clean fuels upgrades. But if I were a refiner, I would hire the best lobbyists in Washington and have them press Congress for new specifications every year. If removing sulfur from transportation fuel has led some margins to nearly double, I would push for requiring Aqua Velva or Chanel No. 5 in some of the new fuel blends.
That might make the roads smell better, and here in New Jersey, we could use some good scents.