West Michigan’s higher prices justified, the pain will continue…

First off: Read this post thoroughly if you want to find out WHY prices are justified.

A brief thank you to Tom Kloza for taking the time out of his day (Publisher @ OPIS) to respond to a few questions I had.

I now understand and can say that I know why Grand Rapids (and all of Michigan) are suffering from higher gas prices than the national average (currently at $3.66/gal)

It all started back around August 11. Grand Rapids prices had been closer to the national average, and then suddenly on the 11th, the difference between NYMEX gasoline and our local rack prices started their disconnect.

Here’s an image (graph provided by GasBuddy, edited by me) to show you exactly what’s been going on:

If you notice, the disconnect is getting worse over time. On August 11, Grand Rapids was quite close to the national average. Around Aug. 15, we had a difference of about 15-cents. On Aug. 23, that shot to 19-cents. Then yesterday it jumped to 25-cents (more like 30-cents since all the stations reset at once here)

On the subject of this matter, people have been convinced we’re being gouged. At first it would appear so, and I was ready to believe it. In haste perhaps, some were even trying to tie the price of oil (same price months ago when gas was 60+ cents cheaper) to the price of gasoline. In my years of doing this, experience has taught me that oil and gasoline prices can never be tied together.

After receiving a response from Mr. Kloza telling me briefly about struggles with getting gasoline here, I went digging. The content below is what I found:

NEW YORK, Aug 11 Reuters – Gasoline differentials in the the Midwest and U.S. Gulf Coast were expected to continue climbing this week as refinery outages, tight inventories and low imports underpin values, dealers said. The latest in a slew of unplanned refinery upsets is a reduction of rates at Marathon’s 222,000 barrel per day Catlettsburg, Kentucky refinery after a crude oil pipeline rupture on Sunday, August 10.

Reduced rates at the refinery are expected to further boost already strong differentials for gasoline in the Midwest, adding to a decrease in gasoline supply in the region after last week’s an outage at Citgo Lemont’s FCC.

“The Magellan system inventories of gasoline have dropped 600,000 barrels since August 1st as new barrels were diverted the St. Louis and Chicago,” one Midwest broker said.

“At 18 days of supply coverage the system is not yet critically short gasoline… (Group Three) must compete for barrels against Chicago for these barrels, so more strength is likely.”

Gulf Coast gasoline differentials were also expected to be supported by a number of refinery upsets from last week.

Lyondell’s gasoline-making fluid catalytic cracking unit at it’s Houston, Texas refinery had an upset last week, and a company spokesman said the unit was still running, but did not specify if it is currently at full rates.

The restart of Citgo’s Corpus Christi, Texas refinery after a power outage last week is expected to last through Wednesday of this week, according to a filing with state regulators.

Gulf Coast gasoline differentials are expected to be further supported by sinking inventories of the motor fuel due to lower imports.

In the New York Harbor, values for conventional gasoline are generally seen tracking the Gulf. But the upside for reformulated gasoline may be capped due to higher inventories of the fuel due to weak blending economics.

After reading that, I found another news story dated more recently, September 5:

NEW YORK (Dow Jones)–U.S. refiners pushed gasoline output to record highs in the days before Hurricane Gustav shuttered operations along the key Gulf Coast.

Many plants are beginning to ramp up operations, but pre-storm oil
inventory data point to several areas of potential supply tightness far
from the Gulf region.

Late Friday, the federal Environmental Protection Agency issued waivers from clean fuel requirements for parts of Georgia, Alabama and North Carolina, and extended waivers in Louisiana until Sept. 15 to “allow for greater flexibility for the fuel distribution system to support an adequate supply of gasoline.” Lost refinery output last week alone could be on the order of 20 million barrels of gasoline and other products.

Power outages to plants and pipelines complicate the matter and spread the problem beyond the region. Midwest refiners – notwithstanding a surge to record-high gasoline output last week -face a supply shortfall as the Capline pipeline, the 1.2 million barrel-a-day main artery for crude supplies from the Gulf to the heartland, is only just resuming partial operations. The Colonial Pipeline from the Gulf to New Jersey, a crucial link for Northeast U.S. supplies, is running at reduced levels.

During September, shipments of gasoline on the vital carrier averaged 1.2 million barrels a day in the past five years, with distillate flows at around 625,000 barrels a day. At best,
refiners are likely to take at least a week to bring operations back, while offshore output will likely take twice as long to return to pre-storm levels, government officials estimate.

The big loss of refining capacity, relative to shut-in crude output, has helped sharp the steep falloff in prices begun when Hurricane Gustav was shown to be less destructive than Hurricane Katrina in August 2005.

Imports, especially of gasoline, are expected to flow heavily from Europe, where the fuel remains in surplus and the usual seasonal decline in demand may blunt the impact of supply losses. The end of August brings an end to the peak summer gasoline demand season, which was battered by high prices this year.

Michael McNamara, who compiles the SpendingPulse survey for MasterCard Advisors LLC, said U.S. gasoline sales between the end-May Memorial Day and Labor Day dropped 3.9% to around 9.4 million barrels a day, after a year-to-year rise in the peak period in
2007 of 2.4%.

Demand Down For 13th Month

EIA data for the four weeks to Aug. 29 show total U.S. oil demand down 733,000 barrels a day, or 3.5%, from a year ago, at 20.292 million barrels a day. That would be the lowest August demand since 2003 and mark the 13th straight year-to-year drop in monthly oil demand.

Preliminary data show January-August U.S. oil demand is down 847,000 barrels a day from a year ago, the biggest decline in the first eight months since 1981. At 19.9 million barrels a day, demand is the lowest in the period since 2001.

A pre-storm surge in gasoline output in the Midwest of 12.3% pushed regional output to a record 2.55 million barrels a day, and pushed nationwide output to a highest-ever weekly level of 9.422 million barrels a day. In an indicator that says more about sluggish demand than about refining capabilities, domestic output of gasoline
topped demand at the end of August for the first time on records dating back to 1991.

The last time domestic output topped demand in any week was in mid-January. Production exceeded demand by a slim 22,000 barrels a day in the latest week, while a year ago, demand outpaced production by 420,000 barrels a day in the last week in August.

Still, while margins favor a counter-season shift to gasoline output over distillate output, and refiners outside the Gulf Coast have some spare capacity, reliability of crude supplies from the region is vital.

Marathon wants to borrow crude oil from the Strategic Petroleum Reserve for running at two Midwest refineries, but the oil must be shipped through the still-limited Capline, which Shell said it hopes to have fully operational in the coming weekend. Valero said it cut runs at its Tennessee refinery.

Talks EIA warns that some local markets may face supply tightness and potential price jumps. But they won’t likely be enough to reverse the slide in prices in recent days, provided there isn’t any lasting damage to facilities.

Front-month crude has been the cheapest of all listed Nymex contracts in the past 10 days, a price curve that suggests weak near-term demand for crude and potential for a significant stock build, as refiners are rewarded for building inventories at relatively cheap prices now. But, at least in the U.S., Gustav is overriding, at least temporarily, those traditional moves.

So basically, on the 11th of August, a refinery went down due to a pipeline rupture. That pipeline may have well carried crude from the Gulf to the Midwest, so naturally when a pipeline goes out of service, oil delivery is effected. With less oil available to refine, supply takes over. Less supply means higher prices. Now we’re suffering from Gustav, which has also closed delivery of oil to some Midwest refiners. Can’t refine products means less supply, means higher prices. Since places outside the Midwest have alternative ways to get crude, their prices are lower because getting oil isn’t an issue like it is here.

A few words from Tom Kloza’s blog:

As I write this, the price of gasoline in the biggest global bulk market (the U.S. Gulf Coast) is trading for some 60cts gal or more above gasoline futures, or about $3.30 gal late Wednesday afternoon. It appears as though Ike has put some of the largest clusters of U.S. refining in jeopardy.

The last time we saw crude oil prices this cheap, the national average price for gasoline was about $3.25 gal. It’s about 40cts gal higher than that now, and I suspect we’ll see more increases in some markets by the weekend, even if Ike fizzles and cuts a path through rural less populated counties. Chicago is many states removed from Hurricane landfall, but even there, we’ve seen the impact of Gustav as well as the threat from Ike. Refiners have had less crude to run, and wholesale prices there have also moved into the $3.25 gal or higher neighborhood. This explains why some Midwestern towns saw some large retail increases even as network talking heads discussed plunging crude prices.

Most of the upwelling we’ve seen in fuel prices in September is related to Hurricane Gustav. It did not significantly damage refinery infrastructure but it did result in a drop in refinery output of nearly 2-million bbl per day last week (as measured by the Energy Information Administration or EIA today). Those kinks of lost daily output are now being felt in places like Kentucky, Tennessee, Illinois, and especially in states like Florida. Even California isn’t exempt — the state gets some of its very clean gasoline from refineries in the Canadian Maritimes and a key plant in the Virgin Islands. Fuel produced at those plants will probably be diverted to coastal states in the U.S. this month.

Even if Ike misses Texas refinery infrastructure, more kinks are coming, and Americans will inaccurately assume that they are being hosed. Capitalism is at work here – supply is threatened—and buyers outnumber sellers, for the moment.

Basically prices are higher because we’re battling other states to buy the same gasoline. The highest bidder wins because this is supply and demand!

Patrick

10 Comments

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  1. Hey guys, first off let me say what a great job you are doing. Now for the important stuff, I have read your post, but do not agree. I simply don’t agree when prices jump 30c in less then an hour. Also, when a Costco has regular unleaded for still $3.65 even days after the $peedway hike, near where I live (east side of the state). I agree with supply and demand, but this is just crazy!

  2. What I don’t understand is how at times when it’s $3.95 here, you can drive to Detroit and see it in the $3.65-$3.70 range. This is what happened to me in the end of July when I went to Detroit for a Tigers game. We paid in the $3.60’s for gas the whole time in Detroit but once we hit Howell on the way home, prices at the gas stations slowly went back up to $3.90’s…

  3. I haven’t had enough time to read through all of your post yet Patrick, but I’m glad you did some more research of the price differences here. I totally forgot about the pipeline problem that Marathon had. I don’t remember if it was a pipeline for Crude coming in or gas going out (and which direction it went if it was). Either way, it doesn’t help things.

    Prices went up about 4 cents last night and the Market has been up around 8-15 cents all day. There is an extremely good chance that prices will go up to $4.059 – $4.099 tomorrow. I really don’t see a way that this Hurricane isn’t going to cause enough damage to keep prices up for a week or more. The predictions keep looking worse every time I check.

    John: I’m not sure what part you are disagreeing with about the 30 cents in less than an hour, the 30 cents or the less than an hour. As far as the 30 cents goes, most stations have a goal of averaging a 13-15 cent markup over their cost. Normally when Speedway goes up they pick a price between 18-22 cents above our cost for the day. 90% of the time that Speedway goes up it is because over half their stores are at or below cost for the day. For example, the day that we went to $3.959, our cost was about $3.75 and they had several stores that were below $3.609. Anytime that you Speedway move more than 20 cents, it is because that store was below cost before the move.

    This is also the reason why everyone else moves so fast. If your margin is less than 10 cents, you are losing money on every credit card sale. So, if your margin is between 10 and -15 cents, you are going to be desperately checking Speedway’s price waiting for them to move so that you can quickly follow. The reason that we all have to wait for Speedway to move is because they only move up when the main office tells them. If I raise my price next to a Speedway, they won’t match it.

    As for Costco (also Sam’s and Wal-Mart) they don’t need to make money on gas and they don’t care if they do either. They use gas as what’s called a loss leader, they are willing to lose money selling it to lead you into the store to buy more profitable items. I’ve read articles before about Costco tracking their profits per customers and between your membership fee and what you buy in the big store, they make much more off each customer than they lose on their gas (plus they get more members because of the gas). That’s why those of us that depend on gas profits to pay our bills, can’t match their prices.

    Tiffany, Detroit is a different world than the rest of the State. For one, the only Michigan refinery is in Detroit and it doesn’t produce enough gas to ship it out to the rest of State, so their rack prices don’t have to be close to the rest of the State. They have the option to get gas from Toledo which is normally cheaper then Michigan. They have tons of competition, and whenever someone drops down to a stupid price, everyone else is forced to follow or lose customers. Plus, they have a lot of problems with unethical station owners that will lie, cheat, and steal to find ways to make money while pricing their gas unbelievably cheap.

  4. That makes sense…thanks for the clarification 🙂

  5. Why would they be selling below cost? What prevents $peedway from going up day by day rather then 30c at one time?

  6. They meaning $peedway

  7. While I agree, I appreciate this site, however do you realize that the gas we are using today has been in storage for nearly 10 years? To raise the price of corn and grain for the farmers, the US Department of Agriculture had silos filled with molding grain and corn the past 8 years to pull back the “availability” and raise the prices for farmers. What in the world makes one believe that there is a legitimate reason for this except that we have PAC after PAC that has interest if not ownership in our media as well. Come on guys. What we need to start doing is boycotting the big guys who are the leaders in all of this and only purchase gas from those who are friendly and not a part of the Pac system that pays off and support certain politicians. Remember Mr. Abraham folks. These guys know that if another party gets into the white house that will not give them the benefits that they are presently receiving, they need to make as much money as possible now.

  8. Thats totally untrue. Gasoline isn’t stored more than 30 days. It simply WOULD VARNISH after more than a year.

  9. @Retailer:
    Appreciate your insight into the Detroit market vs. the rest of the state.

    I don’t know if Speedway raises prices first or if the other guys do, but it’s pretty common to see 25-30 cent increases in Lansing on a Thursday afternoon. And almost always the Lansing Speedways are all at the same price. Does that mean all the Lansing outlets were losing money before the increase?

    @Quick Study:
    I’m not sure what you’re trying to say. Certainly gasoline is stored for some time, but not for 10 years. And what to farm prices have to do with this? Totally different commodities.

    @Patrick:
    Gasoline can last more than a year without varnishing, especially in bulk.

  10. I should have clarified. It depends on what grade the gasoline is before it begins to deteriorate. I should have said that after a year gasoline doesn’t typically meet its original octane rating.

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