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More Than Oil: Refineries Are Playing a Key Role in Lower Gasoline, Diesel Prices

By Ellen WaldCommoditiesDec 15, 2022 10:47
uk.investing.com/analysis/more-than-oil-refineries-are-playing-a-key-role-in-lower-gasoline-diesel-prices-200551274
More Than Oil: Refineries Are Playing a Key Role in Lower Gasoline, Diesel Prices
By Ellen Wald   |  Dec 15, 2022 10:47
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  • The price of oil is not the only factor leading to lower pump prices lately
  • Refineries have been running at nearly full capacity at a time when they usually run at lower capacities
  • The reason is that it is finally lucrative to produce petroleum products again

Gasoline prices in the United States have been declining across the country for the past five weeks. In fact, the average price of gasoline is now lower than it was a year ago. Falling oil prices definitely contributed to the drop in gasoline prices, but the price of oil is not the only factor pushing prices lower for drivers.

Below is a look at how refineries and international trade are impacting the price of gasoline and diesel fuel, based on an interview my podcast cohost and I did this week with Patrick De Haan, Head of Petroleum Analysis at Gas Buddy.

Mr. De Haan explained that refineries had played an important role in both the rise in gasoline prices and their current decline. Generally, refineries in the U.S. enter maintenance season in mid-September, after the summer driving season ends. They slow production or go offline at various points through mid-November to make improvements or do maintenance on their equipment.

This autumn, the maintenance was extensive, but refinery utilization has been unseasonably high since refineries have come back online. In other words, refineries have been running at nearly full capacity (95%) at a time when they usually run at lower capacities. This partly explains why gasoline was more expensive during maintenance season but has come down now that maintenance season has ended.

Diesel prices are also declining. In October, the price of diesel rose sharply because inventories in the U.S. were low, particularly in the country’s northeastern region. The northeast used to rely on diesel imports from Europe, but the continent is no longer importing diesel from Russia, so its own diesel is staying there, and there is very little European diesel available to export to North America.

In addition, the U.S. refinery maintenance season coincided with Europe’s push to build diesel inventories for the winter, so the market for diesel fuel was especially tight in October. At one point, the U.S. had only 25 days’ worth of diesel fuel in inventory, although this situation wasn’t actually as dire as the media made it seem.

Now that refineries are back online and operating at very high rates, diesel inventories are growing, and prices are dropping. In fact, inventories have grown to 31 days’ worth of diesel fuel.

However, colder-than-normal weather forecasts are putting pressure on heating oil, which is essentially the same product. (Heating oil is basically diesel fuel that has been dyed red).

In anticipation of this cold weather, the wholesale price of diesel fuel is rising. However, Mr. De Haan predicts that this will justify refineries to keep their utilization rates higher than normal. This means that gasoline production will also remain high because only part of a barrel of oil can be used for distillates (diesel and heating oil are both types of distillates). The rest must be used for other fuels and products, such as gasoline. If refineries continue to produce high rates of diesel, gasoline prices should continue to drop because the supply of gasoline is growing.

One reason why refinery utilization rates have been higher than normal for this time of year is that the U.S. has fewer petroleum refineries than it used to.

The absence of the Philadelphia Energy Solutions refinery, which shut down in 2019 after a fire, has contributed to tight markets for gasoline and diesel in the northeastern United States. This area later relied on imports from Europe and Russia, both of which are essentially no longer available. Other refineries are switching to producing biofuels because there are significant government incentives to do so. However, the market still demands petroleum products despite government-created incentives, which means that the remaining petroleum refineries must run at higher capacities to keep up with demand.

The good news for refineries is that after several years of losing money or barely making a profit, it is finally lucrative to produce petroleum products.

Disclosure: The author does not own any of the securities mentioned in this article.

More Than Oil: Refineries Are Playing a Key Role in Lower Gasoline, Diesel Prices
 

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More Than Oil: Refineries Are Playing a Key Role in Lower Gasoline, Diesel Prices

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Kavindu Malshan
Kavindu Malshan Dec 15, 2022 13:11
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