Headlines
November 10, 2009
Great Lakes Refineries Plunge Into Dark Ages Margin Abyss
Those individuals that judge oil markets largely on the pixels on their futures screens may want to sneak a peek at finished products values in the upper Midwest. Quietly, but with perhaps dramatic consequences, spot prices for marquee products have slipped below the cost of WTI crude oil futures.
It's the heartland of the country, including some struggling rust belt states, that has taken the first steps in the dark ages for U.S. refining.
This turn for the worse, which has accelerated in the fourth quarter, points to red ink for refiners that run over 2 million b/d of feedstock in states like Illinois, Indiana, Michigan, Ohio and Wisconsin.
Gasoline, for example, represents the highest cut of Midwestern products'
output and prices are depressed by any standard. At presstime, conventional gasoline in the region is available on the spot market at about 15cts/gal under NYMEX RBOB futures. With December NYMEX values at about $1.98/gal, simple arithmetic yielded an outright price of $1.83/gal, or $76.86/bbl.
December WTI futures, however, were still in the $79.50/bbl range. Refineries dependent on sweet look-alike crudes were essentially selling the finished product for nearly $3/bbl below the raw feed. When processing costs of $5/bbl or so are put in the equation, the losses are much more substantial.
The sell-off isn't unusual for Chicago, which can be one of the most bipolar bulk markets in the U.S., but it comes at an unusual time. Prices in the region tend to move dramatically lower when winter gasoline blends are on their last legs, and suppliers dump high RVP gas to make way for more difficult-to-make Spring blends. This sell-off, however, comes at least three months before any such spec change looms.
This year's offseason gasoline sell-off is also damaging because of weakness in other products. The last 60 days of 2008 and some weeks in January and February 2009 saw spot gasoline trade beneath the price of sweet crude, but refiners could claim wide margins for distillate cuts a year ago.
This year's margins for the middle of the barrel represent fractions of what existed in 2007 and 2008. There's not much difference between the current value of diesel in Chicago, which was worth about $2.02/gal at presstime, compared with $2.03/gal one year ago. But there's a huge difference in the cost of crude -- WTI commands a price some $18/bbl above the settlement value on Nov. 10, 2008.
Chicago by the Numbers -- Current Versus Year Ago
Current Price Nov. 10, 2008 Price
---------------- --------------------
WTI $79.50 bbl $64.41 bbl
Unleaded Gas $76.86 bbl $59.35 bbl
RBOB $77.28 bbl $56.82 bbl
ULSD $84.74 bbl $85.28 bbl
Jet Fuel $85.43 bbl $88.41 bbl
Some observers believe that what's at work in Illinois, Indiana, Ohio and other Midwestern states should represent a wake-up call for the disconnect between U.S. downstream products demand and the bubbly price of crude. They suggest that the price weakness for gasoline is indicative of true fundamentals and not the coastal trading dynamic of easy money, carry trades, and the occasional export cargo. The weakness of the U.S. dollar has pumped up the value of benchmark crude numbers, at the expense of participants in the distribution chain, some analysts argue. Much of the weakness in November has come as a large Chicago area refinery has ramped up operations and dumped aggressively priced gasoline in a market that can tilt from tight to saturated in an instant.
Most of the refiners that operate in the region are integrated companies with large segments of income streams tied to the price of crude. But the exception to that rule -- Sun's plant at Toledo, Ohio, for example -- may be feeling a crunch unlike anything felt this decade.
Refinery runs aren't broken out specifically for the region, and the more inclusive PADD2 rate of utilization was recently assessed at 81.8% of capacity, according to the American Petroleum Institute. That number, along with national numbers, may dip to the 70s before year's end, veteran refinery watchers predict.
There are also some consequences in markets that butt up against areas that can be supplied by the upper Midwest. Western Pennsylvania, for example, could see marketers haul product from cheap Ohio racks as long as N.Y.-sourced product remains 10-13cts/gal higher.
November 2, 2009
BP to Sign Markert-Wide Deal for Fuelperks Rewards
BP is about to sign a deal to market the "fuelperks" rewards program through its 32-state market, Oil Express learns.
A spokesman for the British major confirms that the company is running a pilot test of the program, but refuses further comment.
BP has been testing the Fuel Perks concept at 120 or so stations in Minnesota
and Wisconsin markets with the Roundy's supermarket chain, as previously
reported (OE 06/30/08).
Some other retailers, including Shell, Sunoco, and a few regional c-store chains and jobbers, already offer "fuelperks" in scattered geographic areas. For example, Shell just introduced it at 64 sites in Jacksonville, Fla., through a deal with the Winn-Dixie supermarket chain and has launched a limited test with Bi-Lo in Greenville, Asheville and Columbia in South Carolina (OE 08/31/09).
But the agreement with BP will be far broader, say sources. For a start, Excentus will give BP the rights to future market rollouts.
In return, Excentus will have what is essentially an exclusive contract that will allow it to roll out its "fuelperks" offer at BP stations market-wide. Jobbers say BP has been bragging of late that more than 90% of its outlets have already signed up for a price rollback program it intends to offer next year.
Big question is how much BP jobbers will have to pay for the privilege of offering fuelperks, and whether it will be worth it.
Individual grocery chains decide how much of a fuel discount they will offer customers -- usually 5cts/gal off per $50 worth of purchases -- and fund it themselves. Marketers pay a transaction fee to cover Excentus's costs, which jobber sources say run 25-49cts/sale. Pump discounts are limited to 20 gallons per fillup.
As to whether it's worth it, according to Excentus, BP and Exxon- branded jobber Steve Uphoff sold more than 14.2 million gals of fuel through the "fuelperks" offer in less than a year.
Uphoff owns the 40-store Uppy's Convenience Stores in the Richmond, Va., market, and supplies another 80 dealers. He signed up for "fuelperks" via Ukrop's, a local grocery chain. The pair launched the program June 30 last year. By July 19, more than 26,000 Ukrop's customers had enrolled in the program. In May this year, Ukrop's announced its 1 millionth customer and said it had given away $7.42 million in discounts, or an average $7.40 per fillup.
"It's a great program and we introduced it a year ago, at just the right time, when gasoline was nearly $4/gal," says Terry Johnson, merchandising director with Chester, Va.-based Uppy's. "We have seen a double-digit increase in gasoline volume. Customers put the ["fuelperks"] card in and the price at the pump just rolls back and people get a big kick out of that," he told Oil Express. As the discounts are "stackable,"
meaning that they can be accumulated based on purchase amounts, some customers have been able to roll back their price to as little as 59cts/gal.
Uppy's costs, apart from the transaction fee, included costs of software and EPOS upgrades, but BP is expected to pay for that work as part of its introduction of its price rollback program next year. Uppy's also funds a small amount of the Ukrop's discount. "I'd definitely recommend the program," Johnson added.
October 21, 2009
New York Sees Temporary Tight Conventional Mogas Supply at Buckeye
The New York Harbor is facing a very tight dead prompt conventional regular
gasoline for Buckeye pipeline delivery, with the cash price differential
holding about a penny premium to any October barrels, traders told OPIS on
Wednesday.
The outright prices were sharply higher on Wednesday, moving in tandem with
the stronger paper values. The cash outright prices were up by 6-7cts at
presstime.
Dead prompt M4 deals for delivery on the Buckeye pipeline on Wednesday and
Thursday were traded at 2.90-3.25cts over the screen.
However, any October barrels on Buckeye were traded at 2.35cts over.
"The backwardated disparity between the prompt and any values shows that it
is a dead prompt supply issue," a trader said.
Arbitrage incremental gasoline barrels from the Gulf Coast are expected to
arrive via the Colonial pipeline in the first half of November.
The market outlook for gasoline in New York Harbor seems stable to bearish
for end-October and early November.
Conventional regular for barge delivery was valued at 2.35cts over the
screen for the rest of October.
Both Buckeye and barge M4 prompt values should start to weaken when the
arbitrage barrels hit the market, and the price trend should flip into a
contango.
Prompt RBOB was traded at parity to the screen, and any values were flat to
prompt.
European arbitrage barrels are expected to arrive in the Northeast in the
last five days of October as well as the first half of November.
October 9, 2009
Sam's Club Well Ahead of Competitors in Diesel Offering
Warehouse chain Sam's Club hasn't tooted a green trumpet when it comes to diesel, but it looks as though the retailer could be way ahead of other big box chains when it comes to diesel offerings to customers.
The company just closed an older club in Sacramento and opened a store some 40,000 square feet larger on the other side of town that will have the first Sam's Club diesel pumps in northern California. But more importantly, company officials now confirm that all new store openings will see diesel pumps as part of the standard fuel offering. The Wal-Mart subsidiary didn't roll out its first diesel pump until three years ago, but now has about 90 sites with the fuel.
There are no plans to put diesel into Sam's Club parking lots that had gasoline before the 2006 diesel rollout, but the new store offerings clearly give the chain a leg up on competitors Costco and BJ's.
Observers have no word on typical volumes, but a look at retail and wholesale costs for about 50 sites suggests the company has a different model when it comes to diesel fuel. Historical data has long showed that Sam's Clubs sell gasoline for a modest few pennies above cost, but its retail diesel prices have been much
less aggressive.
Data from OPIS RetailFuelWatch over the last five weeks, for example, finds most Sam's sites priced at 15-25cts/gal above laid-in wholesale costs plus tax.
There are some exceptions -- stores in some metro areas in Arkansas, New Mexico, Ohio, Colorado, and Florida have seen margins of 1-4cts/gal or less.
But within the network, there are also clubs in Pennsylvania, Nevada, and Alaska where diesel has fetched margins above 30cts/gal.
Most oil analysts believe that U.S. diesel growth will outpace gasoline demand growth in the next ten years. That possibility has sparked aggressive rollouts of diesel by low-priced chains such as RaceTrac but many similarly sized retailers have yet to make the diesel plunge.
September 14, 2009
BP Says Marketers Can Only Use 89-Octane to Blend
BP says it will make available an unleaded gasoline that jobbers can use for ethanol blending at some of its terminals in North Carolina on Oct. 15.
Problem is, it will be an 89-octane midgrade - BP plans to drop its other two conventional grades, an 87 regular and 93 premium, from its product slate, Oil Express learns.
BP's move puts ethanol blending beyond the economic reach of most of its jobbers in the state. Year-to-date OPIS data shows that BP typically prices its
89 midgrade 6cts/gal or more over its 87 regular. The federal tax break for ethanol fuel is 4.5cts/gal.
BP's decision has infuriated marketers. They see it as a mean-spirited and cynical attempt to get around a new state law that requires refiners to offer an unblended fuel for those who want to produce their own E10 gasoline. Jobbers in other states are eyeing similar legislation to preserve their rights to blend their own fuel.
However, the NC law has a loophole - it does not specify the grade that a refiner must make available. BP, which together with other majors is fighting in federal court to overturn the law, is clearly not following the spirit of the statute, jobbers say.
"This basically takes away our ability to produce an ethanol-blended fuel,"
says one large BP distributor in the state.
"My company buys a lot of unbranded fuel from BP and by doing this, they are going to start missing all of those sales. We're going to quit buying from them. We're going to start looking to do the best we can for our company now. A lot of BP jobbers in North Carolina are ready to quit BP over this. There are plenty of other majors here looking for our business."
The aim of the blending rights bill North Carolina lawmakers passed last year was
to allow marketers to produce their own ethanol blends and pass on some of those savings to consumers, says the North Carolina Petroleum & Convenience Marketers Assn.
BP's decision to offer only an 89 conventional midgrade effectively forces marketers to buy only BP-branded fuel. As a result, consumers in the state are likely to have to pay more at the pump for gasoline. The new product slate only reveals BP's desire to control the way marketers price their product, sources add.
Majors normally make midgrade by blending an 87-octane and a 93 premium.
Since BP will no longer have an 87 unleaded available, the company is looking at two options for producing an 89 midgrade.
For the E10 product, it will ship an 84-octane fuel and blend it with 93- octane premium. For the non-ethanol 89, it is expected to use a 90-octane conventional blendstock that will be shipped by pipeline to the terminal before year's end.
BP could make the same 84-octane grade available to jobbers for ethanol blending but it will not do so. It cites worries about product integrity and quality. Besides, says spokesman Scott Dean, it has to produce a set amount of ethanol-blended fuel to comply with federal renewable fuel standards.
BP notified jobbers in a Sept. 1 letter that it plans to sell only a midgrade "suitable for subsequent blending" at its Selma and Greensboro terminals. The fuel will be dosed with a "sufficient quantity of additive" so that it will meet "both BP brand and applicable legal additive requirements," wrote Elizabeth R. Clechenko, BP's East Gulf Coast sales VP.
"While some competitors may choose to sell an unfinished gasoline product to their customers, BP is not willing to sell unfinished fuels to its customers in light of the quality, integrity and compliance risks at stake," Clechenko said.
In the future, jobbers pulling from Greensboro and Selma must choose on a monthly basis, 30 days in advance, whether they plan to lift BP-branded E10 or the midgrade. Marketers must also have a splash-blending waiver from BP and BP will not allow them to split their volumes between ethanol and straight-run fuel.
"BP will assume customers intend to lift the full slate of BP E10 fuels unless notified otherwise," Clechenko added.
BP's Greensboro and Selma terminals supply about two-thirds of the company's volume in North Carolina, jobbers say.
A jobber who adds 10% ethanol to an 87-octane gets an 89.7-octane product that he can sell as regular or midgrade product. Adding 10% ethanol to an existing 89-octane fuel would yield a 91.5-octane that some jobbers sell as a premium fuel. (BP guarantees its Amoco Ultimate premium to be a 93-octane, so a marketer doing his own blending could not sell his highest grade under the Amoco banner.)
By selling only an 89-octane, BP is stripping marketers of the tax advantage they would get from blending their own product, keeping it for itself.
For example, a Selma marketer who bought 87 unleaded conventional from BP this week could shave about 7.5cts/gal off his net wholesale price for regular, thanks to an ethanol price that is currently about 20cts/gal below gas, plus the 4.5cts/gal federal tax break, and the value of RINs (about 9cts/gal recently).
All but 1.5cts/gal of that advantage disappears if the marketer has to start the blending process with the more expensive 89-octane midgrade.
Marketers could not afford to sell such a product as a regular grade and BP knows it, jobbers say. "BP is going to take its piece of jobber hide anyway it can," one marketer says.