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Last Updated: May 13, 2020
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On April 27, 2020, the U.S. average regular retail gasoline price was $1.77 per gallon (gal), the lowest price since February 2016. On May 4, the U.S. average gasoline price increased slightly to $1.79/gal. The United States declared a national emergency on March 13 in response to concerns regarding spread of the 2019 novel coronavirus disease (COVID-19). From March 16 to May 4, the U.S. average regular retail gasoline price fell by $0.46/gal. The lower gasoline prices reflect low crude oil prices, low gasoline demand, and rising gasoline inventories.

As a result of reduced economic activity and stay-at-home orders aimed at slowing the spread of COVID-19, consumption of petroleum products and the price for crude oil (the primary input for producing gasoline) have both declined. The Brent crude oil price, which is generally more closely correlated than the West Texas Intermediate (WTI) price to the price of U.S. gasoline, settled at $18 per barrel (b) on May 1, down $15/b (45%) since March 13 and $53/b (74%) less than a year ago (Figure 1).

Figure 1. Weekly prices of Brent crude oil and U.S. regular retail gasoline

Falling crude oil prices have coincided with decreasing transportation fuel demand, placing further downward pressure on gasoline prices. U.S. gasoline consumption (as measured by the four-week rolling average of product supplied) fell from 9.3 million barrels per day (b/d) the week ending March 13 to 5.3 million b/d the week ending on April 24.

As consumption has decreased, gasoline inventories have risen to record levels despite refinery run cuts. On April 17, total U.S. gasoline inventories reached 263.2 million barrels, the highest level recorded since the U.S. Energy Information Administration (EIA) began collecting these data in 1990 (Figure 2). Gasoline inventories have since fallen slightly to 256.4 million barrels as of May 1. Although EIA does not collect weekly demand data on a regional basis, low refinery runs and high gasoline inventories indicate low demand in each region. As a result, gasoline prices have decreased in each region. In addition, the U.S. Environmental Protection Agency’s (EPA) temporary waiver of the requirement to switch to summer-grade gasoline is putting further downward pressure on gasoline prices.

Figure 2. U.S. weekly gasoline inventories and stock change

From March 16 to May 4, the average regular retail price of gasoline in the West Coast (Petroleum Administration for Defense District, or PADD, 5) fell $0.58/gal to $2.44/gal, the lowest price since March 2016. The West Coast retail gasoline price is typically higher than the average U.S. price because of the region’s tight supply and demand balance, geographical isolation from other U.S. refining centers—such as the Gulf Coast (PADD 3)—because of very limited gasoline transportation infrastructure, and gasoline specifications that are more costly to manufacture. Although the May 4, 2020, West Coast gasoline price is $0.65/gal higher than the U.S. average, it is $1.27/gal less than West Coast gasoline price for the same time last year.

Total West Coast motor gasoline inventories increased by 5.0 million barrels from March 13 (when the national emergency was declared) to 35.0 million barrels on April 10, the largest inventory since 2013 (Figure 3). More recently, inventories have begun to decline, reflecting low refinery runs as gasoline inventories are drawn down. In the week ending May 1, weekly gross inputs into West Coast refineries fell to 1.7 million b/d, the least on record. The five weeks from April 3 through May 1 had the five lowest levels of West Coast refiner gross production of gasoline on record (going back to June 2010, when EIA began collecting these data). West Coast gasoline inventories have fallen during the past three weeks, but they are still higher than the previous five-year (2015–19) maximum.

Figure 3. West Coast (PADD 5) total motor gasoline inventories

Gasoline inventories in the U.S. Gulf Coast have also increased. From March 13 to May 1, Gulf Coast gasoline inventories increased by 6.8 million barrels (8%) to 89.5 million barrels. Because of refinery run cuts and decreasing refinery yields of gasoline, Gulf Coast refinery gross production of motor gasoline fell to 2.9 million b/d for the week of April 24, the lowest level on record since June 2010, when EIA began collecting these data. The week of May 1, Gulf Coast refinery gross production of motor gasoline increased slightly to 3.0 million b/d. The high inventory levels are putting downward pressure on the price of Gulf Coast gasoline, which fell to $1.49/gal on May 4, down $0.48/gal since March 16 and the lowest price since 2004. The Gulf Coast typically has the lowest retail gasoline price in the country because it has more than 50% of U.S. refining capacity and produces more gasoline than it consumes. However, the Midwest (PADD 2) had the country’s lowest gasoline price from March 30 to April 27 (Figure 4), reflecting lack of demand for gasoline in the region.

Figure 4. Weekly regular retail gasoline price by region

The price of motor gasoline in the Midwest was $1.57/gal as of May 4, down $0.46/gal since March 16. Midwest gasoline prices were lower than Gulf Coast prices for five consecutive weeks, the first time Midwest prices have remained lower than Gulf Coast prices for more than two consecutive weeks since December 2008. As Midwest inventories have begun to decline and Gulf Coast inventories continue to build, the Gulf Coast price has again fallen below the Midwest price.

The East Coast (PADD 1) and Rocky Mountain (PADD 4) regions have also seen falling gasoline prices. As of May 4, the East Coast price was $1.79/gal, down $0.40/gal since March 16. The Rocky Mountain price was $1.77/gal on May 4, down $0.55/gal since March 16. Like the rest of the country, both the East Coast and Rocky Mountain regions have experienced gasoline inventories higher than the previous five-year maximum.

U.S. average regular gasoline price rises, diesel price falls

The U.S. average regular gasoline retail price rose nearly 2 cents per gallon from the previous week to $1.79 per gallon on May 4, $1.11 lower than the same time last year. The Midwest price rose nearly 10 cents to $1.57 per gallon. The Rocky Mountain price fell nearly 4 cents to $1.77 per gallon, the East Coast price fell nearly 2 cents to $1.79 per gallon, the Gulf Coast price fell 2 cents to $1.49 per gallon, and the West Coast price fell more than 1 cent to $2.44 per gallon.

The U.S. average diesel fuel price fell nearly 4 cents to $2.40 per gallon on May 4, 77 cents lower than a year ago. The Rocky Mountain price fell more than 6 cents to $2.37 per gallon, the West Coast, East Coast, Midwest, and Gulf Coast prices each fell nearly 4 cents to $2.90 per gallon, $2.51 per gallon, $2.25 per gallon, and $2.17 per gallon, respectively.

Propane/propylene inventories rise

U.S. propane/propylene stocks increased by 2.5 million barrels last week to 59.4 million barrels as of May 1, 2020, 7.5 million barrels (14.5%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories increased by 1.2 million barrels, Midwest inventories increased by 0.9 million barrels, and East Coast and Rocky Mountain/West Coast inventories each increased by 0.2 million barrels.

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High Oil Prices and Indonesia’s Ban on Oil Palm Exports

Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.  

A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.

Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.

Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.

And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.

That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.

Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.

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Market Outlook:

  • Crude price trading range: Brent – US$110-1113/b, WTI – US$105-110/b
  • As the war in Ukraine becomes increasingly entrenched, the pressure on global crude prices as Russian energy exports remain curtailed; OPEC+ is offering little hope to consumers of displaced Russian crude, with no indication that it is ready to drastically increase supply beyond its current gentle approach
  • In the US, the so-called NOPEC bill is moving ahead, paving the way for the US to sue the OPEC+ group under antitrust rules for market manipulation, setting up a tense next few months as international geopolitics and trade relations are re-evaluated

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Only the most enthusiastic dry herb advocates will, in any case, contend that smoking has never been proven to cause lung cancer. In case we are being reasonable, we would all agree that smoking anything isn't great for your health wellbeing. When you consume herbs, it combusts at more than 1000 °C and produces more than 100 cancer-causing agents. Over the long run, this causes the development of tar in the lungs and will conceivably prompt chronic bronchitis. Vaporizers take care of this problem which can be found in a good       online vaporizer store.



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