Last week, the crude glut in the US Midwest became the gasoline glut. Consumers may finally benefit.
For months, as crude supplies pouring out of the Canadian oil sands and North Dakota's Bakken built up at the Cushing, Oklahoma crude market delivery point, refiners in the US Midwest enjoyed tremendous margins. For example, the simple gasoline crack in the Midwest was almost $40/b in early September. It dropped into the single digits from there, but with the collapse in Midwest crude prices, margins soared again; Platts' Jeff Mower reported just a few days ago that the Midwest WTI cracking margin closed Friday at $22.99/b, up $3.60/b week-on-week, while the cracking margin for Canadian Syncrude jumped a whopping $21.88/b to $44.21/b.
That was great for refiners, but there was no sign consumers were benefiting.
But with the same breathtaking fall that saw crude prices slide, product prices in the Chicago spot market have fallen. They've fallen a lot.
As Platts' David Arno reported last Thursday, conventional unleaded gasoline was assessed January 10 at NYMEX March RBOB futures plus 2.25 cents/gal, and has since fallen fairly steadily to a low of minus 65 cents/gal on Wednesday, according to Platts data. The differential narrowed Friday by 13.5 cts, to 43 cts, but it's still wide by historical standards.
If you're not an oil trader and you can't figure out if 65 cts is a lot, imagine driving to the airport in Chicago and seeing gasoline for $3/gal. Then imagine you land in Philadelphia and it's $3.65/gal. You'd think that was fairly odd.
So is this fall in spot prices relative to the benchmark RBOB price going to impact prices at the pump? There's no reason it shouldn't, because oil companies have been moving their rack prices in line with the collapse in spot prices. Take the Valero unbranded spot price for Chicago, published by Platts in conjunction with DTN Energy. Since the start of this year, it's been as much as more than 10 cts above the NYMEX RBOB price, which is the benchmark for US gasoline trading. It started to sink about a month ago, averaging more than 20 cts less than RBOB for the last nine days of January trading.
But the spread--Valero unbranded Chicago rack vs. NYMEX RBOB--last week suddenly blew out at a crazy rate, to 35.59 cts, 38.36 and 44 cts, respectively, for Tuesday-Thursday. It came back in Friday, as previously noted.
That sort of decline doesn't automatically turn into cheaper retail prices, or at least, cheaper than the rest of the country, particularly if the narrowing of the differential recorded Friday continues. And even if it does, with WTI now pushing up against $105/b, it may be small comfort to Chicago-area drivers that their retail prices didn't go up as much as in some other areas.
But it's interesting to note that Chicago retail prices as measured by the Energy Information Administration have been coming in against the competitive Houston market in recent weeks. For example, Chicago retail prices for regular were more than 43 cts above Houston average retail prices during the week of January 16. In the week of February 13, that spread was a mere 6.4 cts.
There's also a longer-term issue here. The Midwest crude glut is likely to continue. With refinery expansions underway--and there are several set to be completed in the next few years--that crude glut may continue to become a glut of product relative to the demands of the region, which traditionally has imported product from other areas of the country. Is it time to reverse some of those pipelines that had been bringing product in, and instead, ship products out?
For example, the Explorer pipeline, which runs from Houston to Tulsa, Oklahoma, and through Chicago, has been discussed as a potential candidate for reversal so that Midwest products could reach the Gulf Coast. That scenario is unlikely to happen, Explorer spokesman Rod Woodford told Platts. "We would be naive to not look at it, but as of today there are no plans to reverse the line," he said. "Never say never, but the assets would have to be right for it."
Other speculation surrounds the Buckeye Pipeline, which takes product from New Jersey into New York, Pennsylvania and Ohio. But with East Coast refiners shutting due to poor margins, and crude supplies rising in the Midwest, the speculation is that Buckeye might ultimately be better off taking some of that excess Midwest supply back out to the Atlantic Coast.
And as US crude supplies continue to rise, the reordering of everything we've all known about the way the market works continues, moving from stage to stage.
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