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).
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.
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.
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.
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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After the OPEC+ club met on September 1st, and confirmed that it would be sticking to its plan of increasing its crude supply by 400,000 b/d a month through December, China made a rather unusual announcement. It announced that it was going to release some crude oil from its strategic petroleum reserves, selling it to domestic refiners that were grappling with crude’s heady price rise over 2021. The release of strategic oil reserves isn’t news in itself. What is news is that the usually secretive China did it and did it publicly.
And it did it to send a message to OPEC+: attempts to create artificial scarcity to maintain crude prices will not be tolerated. China has a right to feel that way. Even though great strides have been made to ease the effects of the Covid-19 pandemic worldwide, the virus is still exerting major effects on the global economy. Not least a massive ripple through the health of global supply chains that has seen the price of almost everything – plastics, semiconductors, agricultural commodity, lumber, steel – spike due to supply issues. In some cases, the prices of raw materials are at historic highs. Crude oil is still nowhere near its peak of above US$100/b, but it is high enough to be concerning, especially since it is happening within a major inflationary environment. And for a manufacturing-heavy economy like China, that matters. That matters a lot. So China’s National Food and Strategic Reserves announced that it would be releasing some of the country’s crude stocks to ‘better stabilise domestic market supply and demand, and effectively guarantee the country’s energy security’, a month after the country’s producer price inflation – ie. the cost of manufacturing – hit a 13-year high.
China made good on that promise, releasing 7.38 million barrels from its stockpile to domestic bidders on September 24 with more tranches expected. This was the first ever recorded release from China’s Strategic Petroleum Reserves (SPR), which began back in 2009 in serendipitous response to crude oil prices exceeding the US$100/b mark for the first time in 2008. But curiously, it may not have been the first ever release. So secretive is the SPR that China does not reveal the size of the reserve, although analysts have estimated it at some 300-400 million barrels with total capacity of 500 million barrels using satellite imaging. It has been speculated that batches of crude from the SPR have been released before on the quiet. But this is the first time China has gone public. Compared to the country’s overall oil consumption, 7.38 million barrels is small, almost tiny. And even if additional supplies are released, it will not make a major impact on China’s oil balances. But the message is what is important.
It is a message that China is not alone in sending. US President Joe Biden has already called on OPEC+ to accelerate its supply easing plans, given indications that the crude glut built up over 2020 has been all but erased. It is a notion that would be supported by some OPEC+ members – Russia, Mexico, the UAE – but so far, the discipline advocated by Saudi Arabia has held. The US too has attempted to release of its own crude reserve stocks – the largest in the world with a capacity of 727 million barrels – but this was also in response to the devastating impact of Hurricane Ida. India, China’s closest analogue to size and stage, has been complaining too. As a major oil importer and with a shakier economic situation, India is particularly sensitive to oil price swings. US$70/b is way above what New Delhi is comfortable with. But since India’s appeals to OPEC+ have fallen on deaf ears, it is attempting domestic directives instead. India’s state refiners have been ordered to reduce crude purchases from the Middle East, but with supply tight, there aren’t many other people to buy from. India has also been selling oil from its strategic reserve – officially stated to be for clearing space to lease storage capacity to refiners – although since India is more transparent about these announcements, the announcement isn’t as surprising.
Will it work? At least immediately, no. Crude prices did come under pressure in the wake of China’s announcement, but then recovered with Brent hitting US$75/b. But the fact that China timed the announcement of the September 24 auction to coincide with peak global trading time and with a lot of details (again an unusual move) shows that Beijing is serious about wielding its strategic reserves as weapons. If not to moderate crude prices, then to at least stabilise it. But this is a war of attrition. China may very well have a planned schedule to release more crude reserves over 2021 and 2022 if prices remain high, but its supplies are finite. And they will have to eventually be replenished, possibly at an even higher cost if the attempt to quell crude price inflation fails. Thus far, the details of the SPR release hint that this is a tentative dip in the pool: the volume of 7.38 million barrels was far lower than the 35-70 million barrels predicted by some market participants. And because successful bidders can lift the oil up to December 10, it seems unlikely that a second auction for 2021 is in concrete plans at this point.
But, at the very least, the message has been sent. Beijing has a tool that it can wield if crude prices get out of hand, and it is not afraid to use it. The first step might have been small, and it is a giant leap in what mechanics are available to influence crude prices. And as history has proven, China can be very quick to scale up and very single-minded in its approach. Over to you, OPEC+.
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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.
Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.
Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.
This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.
But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.
In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.
But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.
Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.
Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.
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