2015 outlook - opisnet.com · crudeoil extremeswon’tapproachthe $55/bbl(gap between low and high)...
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2015 OUTLOOKSOME TRENDS TO WATCH FOR IN 2015•Gasoline volatility has returned andwill stay for awhile.Crudeoilextremeswon’tapproachthe$55/bbl(gapbetweenlow and high) variances of 2014, but regional gasolinemarketscouldsee$1/galseparateannuallowsandhighs.
•OPISexpectsthatthebroadnationalaveragegasolinepricefor2015(overall365days)willfallbetween$2.349/galand $2.449/gal.That assessment takes into considerationtheadditionalCaliforniacosttiedtocap-and-tradeaswellasafewstatetaxleviesthatarriveinJanuary.Theprojectiondoesnotaccountforanyincreaseinthefederalexcisetax,andwedosuspectthataninitiativetoraisethatlevycouldgaintractionin2015.
•Theannualgasolineaveragemayrangefromjustbelow$2.00/galtoasmuchas$2.75/galthankstothevagariesof just-in-time inventory practices; winter and springrefinerymaintenanceschedules;andtheusualdisruptionsthatoccurwithrefiningequipment,whethertiedtonatureorstructuraldecay.
•U.S. crude oil inventorieswill surpass the contemporarycommercialstoragerecordof399.4millionbblestablishedin spring 2014, with supplies perhaps swelling to 420million bbl or higher. Finished gasoline stocks will alsobulge,perhapsflirtingwith240millionbbl aheadof thedrivingseason.However,the1990highwatermarkof251millionbblofgasolineshouldremainoutofreach.
•The Jones Act, which restricts waterborne petroleumtraffic between stateside ports toU.S. flagged vessels,will remain intact with no significant alterations.Waiverswillbestrictlylimitedtoeventsbroughtaboutbyhurricanesornaturaldisasters.
•CaliforniagasolinepriceswillbecomedisconnectedtotherestoftheU.S.mainland.Indeed,otherthanHawaiiandperhapsAlaska, the Golden State is the only location that mightsee a brief pass at $4/gal numbers.Any such numberwillrepresent an unsustainable spike tied to temporary PADD5refiningissues.Weexpectthatanumberoflessthan$3/galinCaliforniaismorerealisticasanannualaverage,butthestateremainspronetoextreme,albeitfleeting,priceevents.
•The 1970 record level ofU.S. crude oil production (justover10millionb/d)willsurvivetheyearbutU.S.outputwillincreaseandbemaintainedatthehighestdailyoutputlevelsince1973.
•NYMEX gasoline and ULSD futures will once againrepresent the “strongest link” in the U.S. supply chain.Midwesternmarketswillseedieseloccasionallytradeat10%to15%premiumstofuturesmarkets,butmostspotmarketswill see all grades of distillate fetch a discount toULSDfuturesquotes.Thecheapestpricesinthecountrywillcomeviacoastalworld-classrefineriesinTexasandLouisiana.
•Therelationshipbetweenethanolandgasolinewillwanderthrough terrible correlations. Consider that at one pointin 2014,Chicago ethanol commanded an 83cts/gal pricepremiumabovefrontmonthNYMEXRBOBandatanotherpoint, thealcohol soldat a$1.08/galdiscount toRBOB.Downstreampointsforethanoldeliverycouldpotentiallyfindhugepremiumstodownstreamgasolinecostsin2015,althoughwe doubtwhetherwinter and spring rail issueswillbeaschallengingasduringthe2013-2014winter.
•TheU.S. crudeoil exportban (prohibitingcrudeexportsbeyondCanada,Mexico,andtheoccasionalAlaskancargototheFarEast)willnotbeliftedin2015,buttheissuewillcontinuetobehotlydebatedinWashington.
•SalesofE15will rise from2014 levels,but the increasewill be negligible. Questionable blending economics aswellasalackofautovehicleliabilitywaiverswillkeepthisproductonthefringe,ratherthanthemainstream,ofU.S.fuelmarkets.
•Thefirstground-upnewU.S.refinerywillbegincontributingsome7,000b/dofdieseltoNorthDakotaindustryinthefirsthalfof2015.TheDakotaPrairierefineryinsouthwesternNorthDakotawillprocess20,000b/dofBakkencrudeoil.
•Wholesale and retail gasoline distribution will continuetobehighonWallStreet’sappreciation list,withdozensofadditionalchainsacquiredbyexistingMasterLimitedPartnershipsorMLP“wannabes”.
•Severalrefiners,includingatleastonemultinational,willlooktoaddcriticalmass,aswellassecureguaranteeddemandintheformoflongtermdistributorcontractsorevenviaaggressivepurchasesofexistingMLPs.Refinerswillreturntothelistasbuyerswhenretailchainsaremadeavailable.
•Uncertaintyaboutcrudecosts,carbonlegislation,andthefuture of light products demand will limit mergers andacquisitions activity, but we expect the sale of multipleCalifornia properties in 2015, as well as perhaps onerefineryeastoftheRockies.
•Refiners will largely eschew popular spot-sourced dealswithdistributors, thanksmostly to the lureofoptimizingmerchantbulksalesinthehighestpricedmarkets.Pipelinespace fees will become a customary line item for 2015formulaedealsongasolineanddiesel,andthehighercostswillbreedcontroversy.
•Briskgasolinedemandgrowthwillbeoverhypedinearly2015,withmany so-calledanalystsprojectingunrealisticconsumption increases. Changing demographics and theprogressionoftoughCAFEstandardswillkeepdomesticdemandgrowthincheck.
2
2015 COULD BE A MOST VIOLENT YEAR FOR OIL, GASOLINE
ArtandlifeinthepetroleumbusinessintersectedwiththedebutofAMostViolentYearinlate2014,amoviethattellsthestoryofaNewYorkfuelsupplierwhomustdealwithviolence,corruption,anddecaythatthreatenthefamilybusiness.Thetitleappearstobeanappropriatemonikerforaforecastdealingwithoilsupplyanddemandparametersinthenexttwelvemonths.OPISseesthepotentialforplentyofviolenceinpricein2015;threatstobusinessesthatwereincrediblyprosperousfrom2011-2014;corruptionwithinOPECcountries thatshownodisposition towarddisciplineonexports,andperhapsdecayinthestandardaxiomthatlowpricesalwaysgivebirthtodemandbursts.
Thefirstsixmonthsof2014saw$100bblorhigherpricepointsforcrudeonaregularbasis,butthecenturymarkcannotbeviewedaspracticalorlikelyin2015.Evenapricelevelof$80bblseemssuggestiveofapriceceilingasopposedtothegroundfloorlevelthat$75-$90bblhasrepresentedsince2011.
TheNewYearbeganwiththeWTIandBrentfutures’benchmarksinthe$50’s,reflecting50percentorgreaterdeclinesfromspring2014highs.ItalsocommencedwithconsiderablefundmoneystillparkedinlongpositionsinWTIandRBOBfuturesandoptions.What’snotcleariswhetherthatmoneyisreflectiveofpatientconservativecapitalthatispartofthe21stcenturyarchitecturalmarketstructure,orwhethersomebigmoneyis“trapped”inamarketthatcouldstillspiralmuchlower.
Indeed,thatiswherethepotential“violence”risestofront-and-centerconsideration.Itisnolongerinconceivabletoconsideratleastmomentaryvisitsto$40bbloreven$30bblcrude.ThepossibilityofsuchnumberswasevenacknowledgedbySaudiOilMinisterAl-NaimiinaDecemberinterviewwiththeMiddleEastEconomicSurvey(MEES).TheSaudiminister,whomayberivaledbyonlyVladimirPutinasthemostpowerfulindividualinworldoilmarkets,clearlyindicatedthattheKingdomandalliedArabGulfcountrieswereintentonmaintainingmarketshare,observingthat“otherswillbeharmedgreatlybeforewefeelanypain.”
Mostoftheinvestmentbanksandotherglobalthinktanks,however,believethat2015willbefrontendloaded,whichistosaythattheiranalysissuggeststhathigherdemandinthesecondhalfoftheyearwillleadtoanoilpricerecovery.ManyofthesesameresearchersandpunditsincorrectlypredictedanOPECproductioncutattheNovember27meeting,andfewwanttothinkabouttheconsequencesofaworldwith$30barrelto$50barreloilinconsecutivecalendarquarters.
Ironically,lastspringbroughtdeclarationsfromsomeofthelargestinvestmenthousesthatsuggestedoilpricevolatilitywasdead,replacedbyanewnormalofnarrowpriceranges,particularlyfortheglobalbenchmark–Brent.
OPISseesahighlyvolatileandsomewhatviolentcrudeoillandscapein2015.It’ssomewhatsillytoprojectanaveragepriceforWTIorBrent,giventhelikelihoodthattherangeofpricesmightvaryfrombelow$40bbltoabove$70bbl.However,wedobelievethatcheappetroleumvalueswillprovideastimulusforNorthAmericanconsumptionthatwillmanifestitselfinyear-on-yearincreasesforgasolinedemandthisspringandsummer.Higherrefinedproducts’valuesshouldhelpcrudeoilpricesrecoverjustaboutthetimethatOPECisscheduledtomeet(withlowexpectations)inJune.Butunlikemanyofthebanks,weseethepotentialforanotherroundofsellingpressureinthelast100daysof2015,particularlyifOPECoptsforacontinuationofthe“sellwhatyoucan”strategythatprevailedthroughallof2014.
Whatdoesallofthismeanforthemarqueeproduct,U.S.regulargasoline?Again,OPISbelievesthatawiderangeofpricepointscouldprevailthroughthenexttwelvemonthswiththenationalaveragescrapingalowbelow$2galandahighofperhaps$2.75gal.Just-in-timeinventorypracticesshouldcontinuetocreatelocalized“spikes”andthegasolinemarketisforeversusceptibletoevent-inspiredincreases(hurricanes,earthquakes,poweroutages,refineryfires)thathavealwaysbeencapableofcreatingmomentaryboutsofpetronoia(awordcoinedbyanOPISeditorin1998).
OPISsuspectsthatregularunleadedgasolineatthepumpwillaveragebetween$2.349galand$2.449galin2015,withverycheapgasolinebookendingatypicalspring/earlysummerrally.Ifgasolinedemandaverages9-millionb/dthisyear,theapproximateaggregatecosttoU.S.consumersshouldfallbetween$338-billionand$345-billion,giveortaketenbillionorso.Thatwouldcomparetoa2014costofapproximately$461-billion,representingadiscretionaryincome“dividend”thatcouldtop$125-billionforconsumers.
3
The Crude Does Not Abide
Toomuchisalwaysmadeaboutthetwoprinciplebenchmarksforcrudeoil,WTIandBrent.ThesebenchmarkshavebeendisconnectedtomanyNorthAmericanblendssincethefirstArabSpring,andtheymaycontinuetobeapoorgaugeofactualpricesinthefieldsorstoragehubsin2015.LastyearendedwithanarrowingofthespreadbetweenWTIandBrentto$3bblto$4bbl,thanksmostlytoincrediblyaggressivetackofoffshoreproducersbothwithinandoutsideofOPEC.
2015beginswithpricepointsaslowas$40bblforheavyCaliforniacrude,andwiththeCanadianheavysourbenchmark(WesternCanadianSelectorWCS)valuedatjustover$32bbl.Insomecases,afewrefinershaveaccesstopricesrarelyseensince2005.NorthDakotaBakkencrudespentmuchofthelastquarterof2014tradingfora$5-$6bbldiscounttoWTIifbarrelswereprocuredattheClearlake,Minnesotatradinghub,butmuchwiderdiscountsprevailedinwesternNorthDakotafields,givingPacificNorthwesternrefinersachancetobeatoffshoreprices.AttheGulfCoast,benchmarkLightLouisianaSweet(LLS)crudefetcheda$2bblor$3bblpremiumtoWTI.
Inshort,theNewYearbeganwithNorthAmericancrudeoilpricesvaryingbetweenthemid-$30’sandmid-$50’s,orafewdollarsbelowoffshorelightsweetmaterial.U.S.refinersstillhadasignificantadvantageversusglobalprocessorsthankstocheapnaturalgas,andslightlycheapercrude,buttheadvantagewasaboutassmallasithasbeensinceinfouryears.TheexpectationisthatWTIwillcontinuetofetchadiscountof$5bblto$10bblversusBrentcrudeastheyearprogresses,withwiderspreadscommonduringrefineryturnaroundseason.
Crudeoilstocksstart2015atthehighestlevelevertoringinaNewYear,butallsignspointtoU.S.inventoriesbreakingallhistoricalrecordsforstoragebytheendofthefirstquarter,orearlyinthesecondquarter.Notwithstandingtheselikelystatisticaltargets,hugeprojectsthataddedpipelines,bulktanks,andlinefillinrecentyearscanaccommodateamuchhigherinventorythaninyear’spast.Headlinesmaytrumpetrecordinventories,butthesystemcaneasilyhandle410-millionto420-millionbblofcommercialcrudestorage,ifbuildsarenottiedtopipelinebottlenecks.
Despitethepricecarnagewitnessedinthelastsixmonthsof2014,anddespitetheprospectsforhigherinventoriesandlowerrefineryrunsinthefirstfewmonthsof2015,theinvestmentcommunityretainsaverysubstantialnetlongpositionincrudeoil.
NetlengthinWTIfuturesandoptionsended2014withabuyingskewofmorethan320,000contracts,representingahypotheticalpositionof320-millionbarrels.Despitebearishsentimentreadingsandtroublingheadlinesaboutoil,thatisthesecondhighestlongpositiononrecordtoendayear.Only2013sawalargerbuyingskew,withabout38,000additionallongs.Theoverallbreadthofthepaperpositionscontinuestobestunningwhencomparedtopreviousdecades.Longpositionsheldbylargenon-commercialfundstiltedcloseto425-millionbblatyear’send,comparedwitha466-millionbblpositionas2013turnedinto2014.
The U.S. Fuel Tab & Projected 2015 Gas Price Dividend
YearAverage Daily
Demand Millions B/D (EIA)
National Daily Average (OPIS)
Fuel Spending Per Day
Approximate Annual Cost
2009 8.997 $2.345 $886,114,530.000 $323.4 Billion
2010 8.993 $2.774 $1,047,756,444.000 $382.4 Billion
2011 8.753 $3.517 $1,292,940,642.000 $471.9 Billion
2012 8.682 $3.607 $1,315,270,908.000 $481.4 Billion
2013 8.843 $3.494 $1,297,692,564.000 $473.7 Billion
2014** 8.995 $3.340 $1,261,818,600.000 $460.6 Billion
2015* 9.070 $2.399 $913,875,060.000 $333.6 Billion
**2014 demand based on Jan-Oct monthly and Nov-Dec weekly EIA data*2015 forecasted
4
Theyear2014alsoprovidedrecordlevelsforoutrightcrudeoillengthaswellasnetlengthinthefundcategoryandnotsurprisingly, those recordswereestablished inmid-lateJunewhenfutures’marketpeaked tied to the ISIS threat in theMiddleEast.Thenumberofpositionsheldbyfinancialfunds,commoditypools,indexfundsandvariousothernon-industryentitiespeakedatmorethan550,700contractsjustbeforethesummersolstice.Thenetlength(derivedfromtakingthelongpositionsandsubtractingshortpositionsfromthetotal)peakedaweeklateratnearly480-millionbbl.
Theparticipationinthemarketbegsfordifferentiationfromthepreviousnotablecrashthiscentury.Yes,oilpricesdroppedmoreinthe2008/2009debacle,butmuchofthedropcameattheexpenseoffinancialcompaniesthatwerecoaxedtode-leverage.Theaggregatebookofbusinessinfuturesandoptionsisconsiderablyhigher(amongnon-commercialentities)thanitwaswhenweflippedthecalendarfrom2008to2009.
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2008 WTI 2014 WTI
June 6, 2008Dollar collapse
of jobs data
July 3, 2008All-time high
September 15, 2008Lehman Bros. Bankruptcy
October 3, 2008TARP Program an-
nounced
November 11, 2014US Crude oil output tops 9 million b/d.
March 3, 2014Ukraine/Russia confl ict reaches
fever pitchJune 10, 2014
Mosul falls to ISIS
November 27, 2014OPEC leaves production unchanged
35.00
55.00
75.00
95.00
115.00
135.00
2008 Brent 2014 Brent
June 6, 2008ECB Hints at
Interest Rate Hike
September 15, 2008Lehman Bros. Bankruptcy
November 27, 2014OPEC leaves production unchanged
March 3, 2014Ukraine/Russia confl ict reaches
fever pitch
June 10, 2014Mosul falls to ISIS
July 3, 2008All-time high
2008 vs. 2014 WTI
2008 vs. 2014 Brent
5
AnothersubstantivedifferencearrivesviatheoutlookforU.S.production.Notwithstandingthepricecrash,virtuallynooneintheanalyticalpetroleumworldpredictsafall-offinU.S.productionin2015.Manyoftheprojectsthatareabouttogenerateproductionincreaseswerecommissionedthree-to-fiveyearsago.Therewillbetensofbillionsofdollars’worthofprojectcancellations incomingmonthsand thatcouldflatten theU.S.productioncurveorevenmove it lowerfrom2016-2020.ButU.S.oilproductionislikelytorangebetween9.3-millionb/dand9.5-millionb/din2015,withmostofthesignificantslowdowningrowthcominginthesecondhalfoftheyear.
Insummary,2015lookstobeatransitionalratherthanatransformativeyearforU.S.crude.NewoutputfromtheBakken,EagleFord,andPermianBasinplaysisunstoppableforthemoment,buttheseedsoflowerU.S.outputhavebeensown.
U.S. Field Production of Crude Oil (Thousand Barrels per Day)Thiscomingrevaluationofoilismuchmoreakintowhathappenedin1998and1999asoilproductionoutpacedsupplybyawidemargin,thanksinparttoalackofOPECdisciplineaccompaniedbyafinancialmessinAsianeconomies.
Buttherearemanyothersubstantialdifferencesbetweentheongoingpricecalamity,andwhathappenedinpreviousdebacles,particularlythe1998-1999and1986pricecrashes.
Oildidn’tcome into itsownasanassetclass favoredbyhedgefunds, indexfunds,ETFs,commoditypoolsandallofWallStreetuntilthe21stcentury,andparticularlysince2003.Thepapermarketthatrepresentsfutures,options,andotherderivativesisexponentiallylargerthanitwasinthedecadesofthe‘80’sand‘90’s.
Meanwhile,lastyearendedwithU.S.regulatorsopeningthedoorforfurtherexportsofcondensate,andweexpectthattherewillbealivelydebateamongspecialinterestsaboutliftingtheoverallcrudeexportbanin2015.Bothsidesontheissuemaymakecompellingcasesforliftingormaintainingtheban,butOPISbelievesthat2015bringsmuchmaneuvering,butlittleinthewayofpolicychanges.Refinersmaydesiresomesignalsontheissue,assomefaceexpansionprojectswhichcouldbejustifiedundercontinuationoftheban,butchallengedifcrudeoilexportsareallowed.
Footnote: Producers,refiners,andregulatorsallacknowledgethattheStrategicPetroleumReserveisa21stcenturyanachronism,giventhesurgeinNorthAmericanliquids’production,andmuchlessdependenceonforeignoil.WhenU.S.crudepricessurgedinJune2014,SPRbarrelsrepresentedaU.S.assetworthapproximately$74-billion.Byyear’send,thecollapseinoilpricestookthat“strategic”asset’svaluedownbyabout50percent.Lowcrudeoilpriceswillquietthecallforaslimmermorecontemporaryreserve,andanysalesfromthereservein2015willbelimitedtotemporaryneedsbasedonGulfCoaststormimpact.
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1960
Dec-
1961
Nov
-196
3O
ct-1
965
Sep-
1967
Aug-
1969
Jul-1
971
Jun-
1973
May
-197
5Ap
r-19
77M
ar-1
979
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1981
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1983
Dec-
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Nov
-198
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ct-1
988
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1990
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1992
Jul-1
994
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May
-199
8Ap
r-20
00M
ar-2
002
Feb-
2004
Jan-
2006
Dec-
2007
Nov
-200
9O
ct-2
011
Sep-
2013
U.S. Field Production of Crude Oil (Thousand Barrels per Day)
Source: EIA
U.S. Field Production
6
Refining Gets Even More Bipolar It’sincrediblethatsomeU.S.refineriesarenowbundledintoMasterLimitedPartnership(MLP)structures,whichhavetypicallyrequiredvehiclesthatmeetcriteriaforveryconservativeandratablestreamsofincome.Refininghasgenerallybeenaprofitableenterprisesince2009,withcapacitycreepdwarfingthefewclosures(theHessplantinPt.Reading,N.J.andFlintHills’Alaskapropertycomeimmediatelytomind).Butthevariationsfrommonth-to-monthorquarter-to-quarterarefilledwithdramabefittingajuniorprom.
Lastyear,forexample,deliveredafastpacedtripfromthepenthousetothepoorhouseforrefinersinmanyportionsofthecountry.Distillatemarginswerereasonable,ifnotextraordinarilylucrative,foralloftheyearbutgasolinefinishedtheyearwithacollapsereminiscentofthe1978RedSox.Thestandardsofdeviationrelatedtorefineryincomewereoffthechartsin2014,andthosesamechartsindicateamuddledfuturein2015.Integratedoilcompaniesfaceaparticularchallengeas2015beginswithaviciousratherthanvirtuouscycle.Theyratchetedrunsuptoarecord16.822-millionb/dofcrudeoilandfeedstockbyyear’send,floodinganalreadystressedmarketwithplentyofunwantedgasolineand incrementaldiesel,heatingoil,and jet fuel.Toput thatnumber inproperperspective,considerthatyear-endrunsforU.S.refinersasrecentlyas2011werenearly2-millionb/dlower.Theexportmarketforlightproductsatthatpointsawmuchthesamevolumesastoday,sothehigherutilizationthreatenstocreateasloppyU.S.products’market.Theviciouscyclecomesviathethoughtprocessofcompanieswithequitycrudeandarefinedproducts’segment.Theycanfindahomeforlowpricedcrudeandkeeprunshigh,butfacerealdifficultyin“clearing”gasolineanddieselattherefinerygate.Theycanreducerunsandtightenproductsupplies,butthatcouldbringadditionalpressureonanalreadyoverburdenedcrudeoilmarket,particularlyforthevariouslightsweetgradesthathaveoverwhelmedNorthAtlanticmarketssincelastsummer.
Independentrefinersfacenosuchquandary.Fourofthesevenmajorrefiningcenters(U.S.GulfCoast,Group3,Chicago,andthePacificNorthwest)allexperiencedweekswheregasolinesoldforlessthanthevalueofcrudeoilinlate2014,andthat isclearlyunacceptable,particularlysincedistillatecrackshavenarrowedappreciablysincesummer.SellingCBOBorRBOBat less than$5barrelover thecostoffeedstockisa losingpropositionunlessdiesel,heatingoil,andjetfuelyieldmarginsbeyond$20barrel.Throwin theRINsconsiderationfor refinersand it’sclear that running16-million to16.5-millionb/dofcrudeoilmightrepresentarefinerdeathwishin2015.
Itisworthspecialmentiontonotethatpetroleumfutureswereapoorbarometerforrefiningmarginsthroughout2014,andwesuspectthatthesamewillholdtruein2015.ThankstothebottleneckinmovingGulfCoastfueltothenortheast,aswellasthecontinuedaftermathofearlierdecadeclosuresintheCaribbeanandCanadianMaritimes,theMiddleAtlanticandNewEnglandstatesappearentrenchedasthestrongestconsistentlinkinstatesidegasolineanddieselnumbers.We’llthrowintheexpectationoflittlechanceforanyprogressingettingnewAmerican-flaggedtankerstoferrymaterialfromTexasandLouisianarefinerstotheregion.IfyoutossinthelikelyclosingofaEuropeanrefineryortwo(despiteabriefrunofprosperityinlate2014)therecipethencallsforNYMEXfuturesthatareinflatedwhencomparedtomostU.S.physicalmarkets.
OPISbelievesthatrefinerymarginswillsurgeinthelatefirstquarterof2015withmuchof theincreasetiedtotypicalseasonalmaintenanceaswellassomediscretionarycuts.WestCoastprocessorsshouldbethefirstbeneficiariesoflowerruns,butintime,allregionswillhavetheirmoments.Lastyearproducedaverageannualgasolinecracksthatvariedfromabout$6bbl(versusLLS)attheGulfCoasttonearly$15bblontheWestCoast(versusANS),withdistillatecracks$8-$9bblhigher(exceptingtheWestCoastwherethedifferencewasabout$2bbl).
Gas Price
Market & ProductHigh cts/gal
DateLow
cts/galDate
High/Low Difference
Gulf Coast CBOB 290.77 6/20/2014 114.78 12/29/2014 175.99
Chicago RBOB 329.12 6/12/2014 117.2 12/29/2014 211.92
NYH RBOB 314.52 4/22/2014 143.03 12/31/2014 171.49
Group 3 Sub-Octane 297.55 6/19/2014 115.87 12/30/2014 181.68
L.A. CARBOB 332.79 4/10/2014 133.22 12/18/2014 199.57
San Francisco CARBOB
329.52 4/24/2014 132.6 12/16/2014 196.92
PNW sub-octane 330.27 6/20/2014 133.2 12/29/2014 197.07
Average 317.791 127.129 190.663
Gas Diff
Market & ProductHigh diff cts/gal
DateLow diff cts/gal
DateHigh/Low Difference
Gulf Coast CBOB 14 9/25/2014 -38 3/25/2014 52
Chicago RBOB 41 9/9-9/10/14 -29.5 12/29-12/30/2014 70.5
NYH RBOB 28.5 9/5/2014 -28 3/25-3/26/2014 56.5
Group 3 Sub-Octane 35.5 10/24/2014 -29.5 12/30-12/31/2014 65
L.A. CARBOB 34.5 10/2/2014 -19.5 12/18-19/2014 54
San Francisco CARBOB
27.5 9/29-10/2/14 -23 1/9, 1/15/2014 50.5
PNW sub-octane 32 9/4-9/5/14 -25 10/20/2014 57
Average 30.429 -27.5 57.929
7
Similarnumbersappearreasonablein2015,withenhancementsoftentiedtotheserendipityoflogistics’snagsthattemporarilywiden discounts for regional crude that is stranded (WestTexas refinerswere the beneficiaries of occasionallywidediscountsforMidlandcrudein2014).Butgenerally,theverywidedieselmarginsthatcharacterized2014maybehardtorepeatin2015,thankstolowerglobaldemandgrowthandawarmerwinter.Theearlymonthsof2014sawalotofdieselinnortherntierstatesmovetoindustrialandcommercialcustomersthatusedthefuelwhennaturalgassupplieswerecurtailedbythePolarVortex.ButbankpredictionsthatsuggestpoorrefiningreturnsinDecemberareapreviewofasystemicproblemin2015areoverreaching.
Offshore,mostrefineryanalystsbelievethatabout1.25-millionto1.75-millionb/dofglobalcapacityincreasesarecomingthisyear.MostoftheincreasescomeintheMiddleEastandChina,andmostnewprocessingequipmentisdesignedtomaximizedistillateyields,with estimatesof another750,000b/dof diesel available to end-users.Diesel sourced fromPersianGulfcountriesmaynotheadstateside,butitmaysurelyslowdowntheoccasionalexportsofdistillatefromtheU.S.GulfCoasttoEuropeorWestAfrica.AveryrobustexportmarkettoCentralandSouthAmericaisbuiltintoexpectationsforGulfCoastrefineriesunderanycircumstances.
Will the Downstream Renaissance Continue?Threeelementsmade2014perhapsthebestyearonrecordforfueldistributorsandretailers,althoughtherewereworriesthata“toogoodtobetrue”environmentcouldnotpossiblypersistintoanotheryear.Lastyearactuallygotofftoatypicallyroughstartwithsoftvolumesandstressedmarginsinthefirstfourmonthsoftheyear,butfortunesturnedinthelasttwo-thirdsof2014andpromisetocontinueintothefirstpartof2015.
Firstandforemost,gasolinemarginsweresensationalwhenviewedacrosstheexpanseofthecontinent.Averagerack-to-retailgrossmarginsfor2014weremeasuredbyOPISat22.3ctsgal,easilytoppingthe19ctsgalfrom2013thatpreviouslyestablishedthehighwatermarkforthecentury.Therewasevenaslight,butnoticeable,uptickinpremiumgasolinesales.Itappearedasthoughsomemotoriststreatedtheirvehiclestoabitmoreoctaneasthepriceslidequickenedandbrought92or93octanepremiumgradesbelow$2.75galinmostcases.Theuptickwassubtle,atoneortwopercentagepoints,butitismeaningfulwhenoneconsidersthathigheroctaneblendstypicallyaffordedmarketersanother5-10ctsgalofprofit.
ULSD Diff
Market & ProductHigh diff cts/gal
DateLow diff cts/gal
DateHigh/Low Dif-ference
Gulf Coast ULSD 2.75 10/9/2014 -47 12/23/2014 49.75
Chicago ULSD 50 10/31/2014 -24.5 12/31/2014 74.5
NYH ULSD 45 2/5-2/6 -1.75 7/2/2014 46.75
Group 3 ULSD 75 11/6/2014 -34 1/31/2014 109
L.A. CARB diesel 15 5/6/2014 -24 12/15-12/16 39
SF CARB Diesel 17 10/3/2014 -30 12/16/2014 47
PNW ULSD 40 8/28-9/5 -15 12/17/2014 55
Average 34.964 -25.179 60.143
ULSD Price
Market & ProductHigh
cts/galDate
Low cts/gal
DateHigh/Low Difference
Gulf Coast ULSD 306.05 2/20/2014 152.07 12/23/2014 153.98
Chicago ULSD 325.77 2/20/2014 158.86 12/31/2014 166.91
NYH ULSD 348.03 2/7/2014 183.91 12/31/2014 164.12
Group 3 ULSD 320.87 11/6/2014 161.36 12/31/2014 159.51
L.A. CARB diesel 312.85 6/20/2014 171.5 12/16/2014 141.35
SF CARB Diesel 312.67 4/21/2014 162 12/16/2014 150.67
PNW ULSD 326.58 9/3/2014 170.66 12/29/2014 155.92
Average 321.831 165.766 156.066
165.0
185.0
205.0
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245.0
265.0
285.0
305.0
325.0
345.0
365.0
385.0
305.0
325.0
345.0
365.0
385.0
405.0
Weekly Dsl Rack vs Retail
Dsl Retail Dsl Rack
Dsl Retail
Dsl Rack
Weekly Diesel Rack vs. Retail
8
Itwouldbeunreasonabletobelievethat2015willbringasimilarlyprosperousenvironmentforgasolinemarketers,butthatdoesn’tmeanthatamaturingindustrywillreturntothe12.8ctsgalto13.1ctsgalgrossmarginsthatprevailedin2004-2007,andagainin2009.Since2010,grossgasolinemarginshaveaveragedjustshyof19ctsgal,witharangeofannualmarginsfairlylowat16.3-19ctsgalwhen2014isdiscarded.Eachofthefourpreviousyearshasbroughtplentyofregionalvolatilityinspotgasolineprices,andthatappearstoworkinmarketers’favor.
Aswasthecasein2008,gasolinemarginswidenedaswholesalepricesfellasmuchas$1.90galfromtheirspringhighs.Unlike2008,thedownswingwasnotaccompaniedbydramaticdemanddestructionfomentedbyfinancialworries.Thelastfourmonthsof2008broughtmarginenhancement,buttheyalsoincludedanaverage400,000b/dofyear-on-yeardemanddestruction.EnergyInformationAdministration(EIA)weeklydatareportsforthesame“lastthird”ofthejustcompletedyearimplysignificantsalesgrowth.Highermarginsandrobustsalesareatoughcombinationtobeat.
Therewasofcoursetremendousvariationacrossstatesandregions.WestCoastandNewEnglandmarketsprovidedthemostrewardingmarginenvironment,astheytraditionallyhaveinthe21stcentury.ButmarginsinchallengingareasliketheU.S.southeastorsouthwesttoppedpreviousyears,withNovemberandDecemberparticularlyrewarding.EvenBigBoxlocationssoldgasolineforanaverage10ctsgalabovecostfromtheLaborDaythroughNewYear’sEveperiod,findingthataggressivepricepointsdidn’thavetomatchcostinordertoliftcustomercountsinside.
Gasolinemarginsweresatisfyingbutdieselmarginsweresimplyoffthecharts.Distributorsandretailerswhomaderoomforadieselofferingonpumpislandswererewardedbya2014rack-to-retailmarginaverageof35ctsgalfortheyear,andthatincludedanumberofweekswithmarginsabove40ctsgal.Theonlypreviousyearthatsawamarginapproachingthesametierwas2008,andthatyearsawdramaticdemanddestructioncrossthesecondhalfofthatperiod.Theyear-on-yearimprovementfrom2013approached9ctsgal,orabout38percent,andwiderack-to-retailspreadsprevailedas2015began.
Asthemore“global”product,dieselmayhaveachallengingfutureinthecoastalmarketsin2015.Inpreviousyears,strongexportshaveliftedexteriorpointsofthecountrytonumbersoftenwellabovelevelsinland-lockedMidcontinentmarkets.Thattrendmaygivewaytoadifferentdynamicin2015.Just-in-timeinventorymanagementisclearlyinadequatetomanageburstsofdemandtiedtoagriculturalplantingandharvests,soMidwesternmarketsmaycontinuetotakeflightversusN.Y.,LosAngeles,andGulfCoastpriceswhenthosedemandburstshitlocalregions.Concurrently,refinersonthecoastsmayfacemoredifficultyinplacingdistillatecargoesintooffshoredestinations,thanksinparttotheaforementionedstart-upin700,000b/dofnewglobaldistillateproduction.
So,a35ctsgalgrossmarginenvironmentmightberealisticforthefirstchapterof2015,butMidcontinentmarketingmarginswillcompresswiththeagriculturalbuyingspurts.Meanwhile,differencesbetweenstatesmaynarrowascoastalrefinersstruggletomaintainexportsthatflattenedoutatabout1-millionb/din2015.Arack-to-retailmarginof25ctsgalormore,slightlyabovetheaverage24.1ctsgalreturnfrom2009-2013isareasonableprojection.Hugevariationswillprevail–OPISrecordedsomeoccasionalweeklygrossmarginsof90ctsgalto$1.00galinsomeRockyMountainstatesinlate2014.
Thefinalfeatherinfuelretailers’capscameviamuchhigherpropertyvaluations.Highervaluationsfordistributioncontracts,dealerrentagreements,andothertypically“sleepy”segmentsofthedownstreampetroleumbusinesscamefirstfromWallStreet.Yearsago,GlobalPetroleumbecamethefirstpubliccompanytoputelementsofdistributionincomeintoan“MLP-
15.0
25.0
35.0
45.0
55.0
65.0
75.0
85.0
95.0
105.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Weekly Unl Margin vs Dsl Margin
Unl Margin Dsl Margin
Unl Margin
Dsl Margin
Weekly Unleaded Margin vs. Diesel Margin
9
Start Date Unl Retail Unl Net Unl RackUnl
MarginDsl Retail Dsl Net Dsl Rack
Dsl Margin
12/30/2013 332.3 281.7 262.6 19.1 387.6 330.7 305.4 25.2
1/6/2014 331.3 280.8 262.0 18.9 387.4 330.5 299.6 30.9
1/13/2014 329.8 279.4 260.3 19.1 386.3 329.4 299.9 29.6
1/20/2014 328.6 278.2 260.3 17.9 386.2 329.3 305.2 24.1
1/27/2014 328.0 277.6 259.8 17.8 389.2 332.2 313.7 18.5
2/3/2014 327.8 277.4 261.9 15.4 392.3 335.3 316.5 18.8
2/10/2014 333.6 283.1 270.3 12.7 395.2 338.2 319.2 19.0
2/17/2014 339.3 288.8 275.5 13.3 397.6 340.6 324.8 15.8
2/24/2014 344.7 294.0 278.4 15.6 400.2 343.0 322.3 20.8
3/3/2014 348.1 297.3 282.8 14.5 401.1 344.0 322.1 21.9
3/10/2014 350.9 300.2 285.8 14.4 400.9 343.8 314.4 29.4
3/17/2014 352.9 302.1 285.6 16.5 399.6 342.5 308.6 34.0
3/24/2014 354.3 303.5 287.8 15.7 398.0 341.0 308.9 32.2
3/31/2014 357.2 306.4 293.4 13.0 397.0 340.0 308.4 31.6
4/7/2014 362.1 311.3 299.3 12.0 396.2 339.3 308.7 30.5
4/14/2014 366.2 315.4 301.1 14.3 396.0 339.1 313.4 25.7
4/21/2014 368.9 318.0 302.8 15.2 396.4 339.4 315.1 24.3
4/28/2014 368.4 317.6 297.1 20.5 396.3 339.3 309.3 30.0
5/5/2014 366.2 315.4 291.0 24.4 395.1 338.1 305.3 32.8
5/12/2014 364.6 313.8 293.9 19.9 393.8 336.8 305.2 31.6
5/19/2014 365.3 314.5 297.8 16.7 392.9 336.0 304.7 31.3
5/26/2014 366.2 315.4 298.5 16.9 392.2 335.3 302.4 32.9
6/2/2014 366.0 315.2 295.9 19.3 391.2 334.3 295.4 38.9
6/9/2014 365.4 314.6 297.9 16.6 389.7 332.8 297.3 35.5
6/16/2014 367.8 317.0 301.2 15.7 389.5 332.7 306.3 26.4
6/23/2014 368.3 317.5 298.5 18.9 390.4 333.6 308.3 25.3
6/30/2014 366.5 315.8 293.4 22.4 390.1 333.2 302.2 31.0
7/7/2014 363.2 312.6 285.8 26.8 389.1 332.2 295.6 36.5
7/14/2014 358.9 308.3 279.2 29.1 387.3 330.3 292.1 38.2
7/21/2014 354.3 303.8 276.3 27.5 385.4 328.5 293.5 35.0
7/28/2014 351.2 300.7 273.6 27.1 384.2 327.3 296.7 30.6
8/4/2014 348.1 297.6 273.1 24.6 383.1 326.1 295.5 30.6
8/11/2014 346.7 296.3 274.3 22.0 382.2 325.3 295.0 30.3
8/18/2014 344.0 293.6 272.0 21.6 381.2 324.3 291.4 32.9
8/25/2014 343.6 293.2 273.4 19.8 380.3 323.5 293.6 29.9
9/1/2014 343.8 293.5 273.2 20.2 379.9 323.1 293.7 29.4
9/8/2014 341.3 291.0 265.1 25.9 379.1 322.3 286.9 35.4
9/15/2014 335.8 285.6 260.8 24.8 377.0 320.2 281.6 38.6
9/22/2014 334.3 284.1 262.7 21.4 374.9 318.1 277.9 40.2
9/29/2014 331.6 281.3 253.4 27.9 373.0 316.3 276.3 40.0
10/6/2014 323.8 273.5 237.2 36.2 370.0 313.3 270.2 43.1
10/13/2014 314.4 264.2 226.2 38.0 365.7 309.1 264.9 44.2
10/20/2014 307.0 256.7 225.2 31.5 362.6 306.0 267.1 38.9
10/27/2014 300.5 250.3 222.4 27.9 360.2 303.7 268.0 35.6
11/3/2014 294.8 244.7 219.4 25.3 360.9 304.3 275.6 28.7
11/10/2014 290.9 240.8 214.5 26.3 363.6 306.9 270.9 36.0
11/17/2014 284.1 234.1 207.4 26.7 360.8 304.1 261.2 43.0
11/24/2014 279.1 229.1 205.2 23.9 358.0 301.4 257.2 44.2
12/1/2014 271.1 221.4 189.0 32.4 353.8 297.3 236.1 61.2
12/8/2014 259.8 210.2 173.1 37.1 345.4 289.0 213.5 75.6
12/15/2014 245.4 195.9 157.6 38.3 333.6 277.5 195.8 81.7
12/22/2014 233.7 184.4 150.1 34.3 322.1 266.1 189.2 76.9
12/29/2014 227.5 178.3 147.0 31.2 315.6 259.8 183.3 76.5
Weekly Margin
10
able” structure, and they have been followedwith similarmoves fromNorthernTier,ETP (Sun), andCrossAmericaPartners(affiliatedwithCSTBrands).OPISanticipatesthatat least two new publicly tradedMaster Limited Partnerswill debut on Wall Street in 2015, and we wouldn’t besurprisedtoseesometraditionalcompaniescreateormorphintosimilarentities.
Secondly, retail gasoline properties are in demand fromrefiners who continue to bundle distribution operationsinto a traditional corporate structure. Refiners are awareofafairlyflatdemandgrowthcurvefordomesticgasolineanddieselsalesthroughdecade’send.Flattolowergrowthin transportation fuels will be impacted bymuch tougher(and difficult to repeal) CAFÉ standards as well as U.S.demographicdatathatfindsyoungpeopledrivingless,andanagingpopulationcurtailing its travel.Thanks inpart tothepenaltiesthatcomewithRINspurchases,highrefineryutilization, and less speculative trading, a sale of bulkgasolineinthespotmarketisoftentheleastdesirablesalefor
arefiner.The“merchantrefinery”modelthatprevailedfrom1990to2010maygivewaytosomethingthatmightappearnostalgic,butisinfactpurposeful.Througheitherlongtermcontracts,orviathepurchaseofdownstreamdistributionandretailassets,U.S.refinersareracingtowardmoreintegrationsotheyhaveahomeforunwantedlightproducts.Themodelfor thisnewinitiativemaybeMarathonPetroleum,whichcannowplacemuchof itsgrowingproduction in itsownsystem,thankstoitspurchaseofHessin2014.
This brings us conveniently to our final thought for2015. From1990 through 2010,we sawmultinational oilcompaniesexit fromretailoperations,partlyrationalizeorconsolidaterefiningproperties,andconcentratemosteffortandcapitaloninternationalexplorationandproduction.Theabilitytofindahomeforcrudeoilaswellasgasolineandotherlightproductsisparticularlyseductiveinwhatmaybeanewlow-to-moderatepricederaforpetroleum.Weexpecttoseemoreinterestincontrollingthedistributionandsaleofgasolinebymega-companiesinthecomingyear.
TOP TEN STORIES OF 2014 •OPECmeets inViennaas theU.S.celebratesThanksgivingDay, and simply rolls over its existing production quota.Later, key oil ministers acknowledge that the cartel wouldrathermaintainmarketsharethancutoutputandcedesalestogrowingnon-OPECproduction.Pricesslideto67-monthlows.
•Brentcrudesurgestoover$115/bbl(June19-20,2014)andWestTexasIntermediatetops$107.50/bblonfearsthatISISinsurgentscouldthreatenoilinstallationsinsouthernIraq.Thefearsprovetobemisguidedwithcrudeonasteadydowntrendthroughtherestoftheyear.(ISISreferstotheIslamicStateofIraqandSyria,andisalsoreferredtoasISIL)
•U.S.crudeoilproductionatyear’sendtops9.1millionb/d,representingthehighestdomesticoutputsinceFebruary1986.Early2015productionwillalmostcertainlytop9.173millionb/d, toppingFebruary1986,andtherebyreflect thehighestoutputsince1973.Production isapproximately4.2millionb/dhigherwhencomparedtotheDecember2005level.
•TheEnvironmentalProtectionAgency“punts”onthefinal2014RenewableFuelStandard(RFS2)(Nov.21)notingthatitintends“totakeactiononthe2014standardsrulein2015priortoorinconjunctionwithactiononthe2015standardsrule.”TherulingaddstoRINs’pricinguncertaintyfor2014andinto2015.
•Mid-autumnbringsdrasticrevisionsfortheworldandtheU.S.TheInternationalEnergyAgencyslashes its forecastfor global oil demand growth, downgrading the 2014annualgrowthrateto700,000b/d(from900,000b/d)andremoves300,000b/d fromthe2015forecast.TheEnergy
InformationAdministrationsharplycutsitsprojectionsfor2015gasolinepumpprices,droppingtheprevioustargetby34ctsgal,positinga$2.60galaveragefor2015.
•Midwestern propane prices hit an all-time record of$4.325/galonJan.24thankstothe2014PolarVortexanddownstreamshortages.Byyear’send,Midwest(Conway)propaneisworthlessthan48cts/gal.
•PioneerandEnterprisereceiverulingsfromtheDepartmentofCommerceallowingtheexportof“processed”condensateforexport.Thecontroversialmoveonlyallowsforexportsofcondensatetreatedbystabilizers.
•A robust secondary market for Colonial Pipeline linespacedevelops,thankstowidedifferencesbetweenGulfCoast and NewYork Harbor prices. Those companieswith incremental line spacecan resell the rights to thatspace for asmuch as 20-25cts/gal.By autumn, severalkey refiners begin charging additional fees to reflectadditionalcostsofshipping.
•Marathon purchases over 1,256 company-operated Hessstations and 86 branded dealers fromHess in a stunningdealvaluedat$2.8billion.ThetransactionwasannouncedinMay,closedinOctober,andincludedallHesstransportoperationsaswellasshipperhistoryonvariouspipelines.
•Enterprise pays $4.41 billion and acquires massiveOiltankingPartners in a deal thatwill give it immenseexportoperationsforcrudeoil,refinedproductsandLPGwithintheUnitedStates.
11
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