October 26, 2022
Source: US Energy Information Administration
Photo Source: Unsplash, Hello I am Nik
This Week in Petroleum
Recent West Coast gasoline and diesel prices show significant volatility
Gasoline spot prices on the West Coast (PADD 5) decreased significantly in the first week of October 2022 following a steep price increase in late September. In early October, West Coast diesel spot prices also decreased significantly following a steep rise, albeit to a lesser degree than West Coast gasoline prices. Recent price movements for both products reflect how sensitive West Coast petroleum product prices are to relatively small changes in refinery output and import levels. Summarized here are the data and trends we are currently following that may be affecting these regional price movements.
In the week from September 21 to September 28, the Los Angeles spot price for California reformulated oxygenate blendstock (CARBOB, the petroleum component of gasoline in California) increased by $1.02 per gallon (gal) to $4.97/gal (Figure 1). In the following week (September 28 to October 5), that price increase was reversed by a $1.80/gal price decrease, the largest one-week inflation-adjusted price decrease in data going back to 2010.
Over the same two weeks, gasoline spot prices on the U.S. Gulf Coast—which reflect price movements in a U.S. market with many refineries and an ability to receive imports or shipments from other regions—did not experience the same level of volatility. This difference in volatility suggests the drivers behind the recent Los Angeles CARBOB price movements, which were similar to those in other West Coast markets such as San Francisco and Portland, were factors more relevant to the West Coast. This West Coast gasoline and diesel price volatility has attracted scrutiny by state and federal policymakers, market participants, and consumers. The complexity of regional petroleum product markets, and the history of volatility on the West Coast in particular, will remain a subject of study by energy analysts, including EIA, in the future.
Los Angeles spot prices for diesel were not as volatile as those for gasoline in Los Angeles, but they still ranged wider in October than benchmarks in other U.S. regions, such as the Gulf Coast. From October 7 to October 14, prices for Los Angeles’s California Air Resources Board (CARB) ultra-low sulfur diesel fuel (ULSD) decreased by 97 cents/gal, while Gulf Coast ULSD prices decreased 6 cents/gal. In that same period, Los Angeles CARB ULSD prices went from the highest among prices in Los Angeles, New York, the Gulf Coast, and Chicago, to the lowest—and they remain the lowest among these hubs as of October 25.
Although West Coast diesel price movements have been more volatile in October than prices in other regions, they have not been as volatile as prices for Los Angeles gasoline. One likely influence is the West Coast’s relative demand for gasoline versus diesel. In 2021, 2.9 times as much gasoline was consumed in the West Coast as distillate, whereas the average U.S. ratio was 2.2 times. Another likely influence is California’s increasing use of biodiesel and renewable diesel in place of much of its diesel demand, limiting the effect of changes in petroleum diesel refining levels.
Unique characteristics on the West Coast, and in California in particular, influence the supply of petroleum products, and may be causing the region to be more susceptible to wide price swings. The West Coast is isolated by geography and a lack of petroleum infrastructure connections to the rest of the United States.
In addition, California state regulators require different gasoline and diesel specifications than the rest of the country. Consequently, the West Coast generally must maintain steady refinery runs to ensure regional supply meets demand, and any refinery outages can disrupt this balance. Furthermore, when refinery outages occur, West Coast markets must draw down local inventories or import product from refineries in Asia to meet demand because of the different fuel specifications.
West Coast gasoline inventories decreased from the beginning of August to the end of September and fell below their five-year (2017–2021) range at the beginning of September. Distillate inventories remained within their five-year range for much of September but were generally decreasing in the month before falling to below their five-year range briefly from September 30 to October 14. These low inventories may also have contributed to West Coast market conditions in which prices react strongly to relatively small changes in supply. Decreased refining capacity may have also made West Coast spot prices more sensitive to supply changes. Since 2020, West Coast refinery capacity decreased due to the conversion of the 161,000 barrel per day (b/d) Tesoro (Marathon) refinery in Martinez, California, to renewable diesel. Following this closure, refining capacity on the West Coast fell below 2.7 million b/d, down 9% from the end of 2017. The limited supply options driven in part by a combination of low inventories and reduced refining capacity may have contributed to an environment in which changes to supply on the West Coast result in large price responses. The September gasoline price increase corresponded to a period of modestly lower West Coast refinery runs. The large price decreases for gasoline and diesel occurred when refinery runs increased slightly in mid-October and imports increased from extremely low levels.
In mid-September, refinery runs on the West Coast decreased slightly when several refineries underwent outages because of planned maintenance or unplanned incidents. The rolling four-week average of gross inputs to refineries decreased by less than 0.1 million b/d (3.5%) from September 9 to October 7, at the same time that spot prices rapidly increased.
Lower refinery runs contributed to withdrawals from West Coast product inventories, and Los Angeles spot prices may have been driven higher to attract petroleum product imports, particularly gasoline, from Asia. West Coast gasoline imports were especially low from August 12 to September 9, before increasing in mid-September when Los Angeles and other West Coast gasoline spot prices were increasing (Figure 4). Higher distillate imports in August and early September could have restrained spot diesel price increases until early October, when West Coast distillate imports and refinery runs were among their lowest levels of the year. West Coast distillate imports picked back up slightly during the week ending October 14, which was the same week West Coast refinery runs also began to pick up. At the same time that West Coast refinery runs and product imports increased slightly in the first half of October, Los Angeles spot prices decreased rapidly. Gasoline and diesel price volatility has continued throughout October, however, with the price of Los Angeles CARBOB increasing 62 cents/gal in the past week (October 18 to October 25), more than the other U.S. gasoline hubs. Nevertheless, the October 25 Los Angeles CARBOB price remains $1.80/gal below its September 28 high. Los Angeles CARB ULSD remains 7 cents/gal lower than the price of Gulf Coast ULSD as of October 25, and $1.00/gal lower than its October 7 high.
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