Analysis: $8 California Gasoline and the Mideast Crisis

MIAMI, FL (DTN) – Californian gasoline prices surged for a ninth straight week this week, with $8 gallon at some Los Angeles stations underscoring the Middle East conflict’s impact on a state 13,000 miles away.

While L.A. prices are not representative of the entire state, Californian fuel remains the priciest across the U.S.

The statewide average stood near $5.40 gallon as of March 23, according to data from the U.S. Energy Information Administration and the American Automobile Association. Across the 50 U.S. states, the average hovered closer to $3.60 gallon, reflecting the premium Californian drivers paid at the pump.

Retail prices aside, the wholesale market for gasoline is tightening as well, EIA data shows. Refinery utilization in the West Coast region, known as PADD 5, fell to 79.8% in the week ending March 13, down from 83.8% the prior week. Similarly, gasoline inventories declined by 900,000 bbl to 27.4 million bbl, amid ongoing supply constraints.

In the spot market, Los Angeles CARBOB’s regular basis increased to a 45cts premium to May NYMEX RBOB futures, with ULSD and Jet fuel premiums following suit on firm demand.

The heightened prices and market activity are a result of the ongoing Middle East conflict, where Iran ‘s blockade of the Strait of Hormuz has paralyzed roughly 20 million bpd of global petroleum supply. California is particularly impacted, accounting for approximately half of the 600,000 bpd of crude that the U.S. imports from the Persian Gulf.

“California operates with very little excess refining capacity, so when a refinery closes or production declines, prices can rise quickly because there is limited ability to replace that supply,” said Paul Ronney, who chairs the department of mechanical engineering at the University of California, Los Angeles.

Perfect Storm

Recent refinery shutdowns involving the 145,000 bpd Valero Benicia refinery and 139,000 bpd Phillips 66 Wilmington refinery had outed 17% of Californian refining capacity. The state relies heavily on instate production and marine imports, so whenever refinery output declines or inventories fall, prices can move sharply higher, Ronney observed.

Mark Jacobsen, economics professor at the University of California San Diego, offered a second perspective on what was possible for gasoline prices in the near future.

“The futures market for oil may contain the best prediction about what will happen, though this market has historically not been all that accurate,” said Jacobsen. “Even so, it is a better predictor than any individual’s guesses about the future of oil and geopolitical events.”

In the most alleviating of circumstances, Canada’s crude imports, priced at above $100 bbl due to the Iran war, could be near $74 bbl a year from now, Jacobsen said. That would still be about $10 a barrel higher than pre-war levels.

Since each $1 increase in crude typically translates to roughly 2.5cts gallon more at the pump, that implies gasoline could remain about 25cts gallon above levels seen before the Middle East conflict.

Analysts in general believe California’s fuel market will remain elevated and highly volatile as it faces multiple headwinds at once. Reduced refining capacity, declining inventories and limited alternatives could all work together to create a perfect storm for the state’s drivers.