High gasoline inventories lead to lower prices, refining margins

As growth flattens for U.S. gasoline demand and refinery output remains high, motor gasoline refining margins have been low or turned negative for refiners along the East and Gulf coasts, according to the U.S. Energy Information Administration. Gasoline refining margins, or the difference between the spot prices of gasoline and Brent crude oil, have declined since August, and they have reached the some of the lowest points in five years in October and November. However, strong growth in distillate demand has led distillate prices and refining margins to increase.

Low gasoline and high distillate refining margins could lead refiners to produce more diesel fuel instead of gasoline, according to the EIA. Similar margin trends look to be taking place in Europe and Singapore.

Most U.S. refineries produce about twice as much motor gasoline as distillate fuels, and refiners cannot completely stop making gasoline. The strong demand for distillate has led refineries to increase production, leading to more gasoline. As a result, inventories of gasoline have risen to a level higher than the five-year average since mid-August. In November, average inventories were 14.8 million barrels higher than they were in the same month in 2017. Over the same period, inventories of distillate have decreased by 5.8 million barrels.

Higher gasoline prices in 2018 have hurt growth in U.S. gasoline demand, and along with increased gasoline production as a result of strong demand for diesel fuel, gasoline production has exceeded demand. Rising inventory levels of gasoline have led gasoline prices to fall and gasoline margins to decrease.

The margins at New York Harbor were 26 cents per gallon in the first half of 2018, but were 4 cents per gallon in October and were negative so far in November. In the Gulf Coast, margins have fallen from 27 cents per gallon in the first half of 2018 to 1 cent per gallon in October and have become negative in November. Margins at New York Harbor for ultra-low sulfur diesel were 38 cents per gallon in the first half of 2018 and have risen to 40 cents per gallon in October and to more than 50 cents per gallon in November.

Through the first three weeks of November, gasoline consumption has declined by 262,000 barrels per day to an average of 9.2 million barrels per day in November 2017. Over the same period, U.S. distillate fuel oil production has risen by 216,000 barrels per day as a result of economic activity and increased freight and trucking activity.

Gasoline refining margins are expected to remain low this winter and should return to normal seasonal patterns by the 2019 summer driving season, according to the EIA. The margins are expected to be 13 cents per gallon in the fourth quarter of 2018, down from 29 cents per gallon in the same period in 2017. In the second and third quarters of 2019, the margins are expected to rise to 36 cents per gallon. Diesel fuel margins are expected to be an average of 46 cents per gallon in the fourth quarter of 2018 and gradually rise to 53 cents per gallon in the fourth quarter of 2019.