On Monday, October 8, the average retail price of regular gasoline in California reached $4.66 per gallon, driving the West Coast average price to $4.41 per gallon, the highest weekly price since the summer of 2008. The sharp price increase came after a combination of refinery and logistical problems stressed a market that had been operating with persistently low inventories throughout much of 2012. The higher prices last week were limited geographically to California, and wholesale prices have already declined sharply following a waiver from the Governor of California that allowed an early switch to winter-grade fuel and as disrupted refinery operations returned to normal.
As discussed in the August 22 edition of This Week In Petroleum, due to a lack of significant pipeline connections to other regions of the United States, and because of its distance from the actively traded physical product markets of the Atlantic Basin, supply disruptions on the West Coast often have a larger impact than disruptions in the eastern part of the country. Prior to the recent price increases, gasoline markets on the West Coast have been periodically tight during 2012. A series of refinery outages since February have led to persistently low gasoline inventories (Figure 1). Gasoline supply issues began with a fire at BP's Cherry Point, Washington, refinery, which caused a three-month shutdown. Market pressures intensified after BP's Carson City, California, refinery underwent planned maintenance in March. These outages, combined with other smaller market disruptions, contributed to sharp inventory draws through the spring. West Coast gasoline inventories fell to 24.1 million barrels by May 18, more than 5 million barrels (about 20 percent) below the five-year average level for that time of year, making it the lowest level in more than ten years and the second lowest level since the beginning of the data series in January 1990.
Gasoline inventories rose from late May into June as refinery issues abated and as higher prices attracted incremental supplies from outside the region. Despite the increase, inventories remained below their seasonally typical five-year range for most of the summer. A crude unit fire at Chevron's refinery in Richmond, California, in early August put additional stress on supply, and press reports have indicated that the Richmond crude unit will be out of service through 2012. Tesoro's Golden Eagle, California refinery, undertook planned maintenance in September, further pressuring West Coast markets. By the end of September, gasoline inventories in the region were again below the seasonally typical five-year range.
On October 1, ExxonMobil's Torrance refinery experienced a sudden and unexpected loss of power from the utility grid that resulted in a shutdown. With inventories already low, concerns about the adequacy of gasoline supplies drove wholesale prices higher on the West Coast during the first week of October (Figure 2). As of the market close on September 28, California specification reformulated blendstock for oxygenate blending (CARBOB) was trading at $3.37 per gallon in Los Angeles, and had averaged a 6-cent-per-gallon premium to RBOB in New York Harbor over the previous ten trading days. By October 4, CARBOB in Los Angeles had reached $4.39 per gallon, a $1.16 premium to New York Harbor RBOB. CARBOB has historically traded at a premium of 10-15 cents per gallon to New York RBOB. This premium is mostly due to the additional cost to produce CARBOB; it is also volatile and depends on other factors such as transportation costs and market conditions.
Unlike other disruptions on the West Coast this year, which affected prices in Washington, Oregon, and California, the impact of last week's disruption was generally limited to California. News that the Torrance refinery had returned to normal operations on Friday, October 5, calmed wholesale prices. More importantly, on October 7, the California Air Resources Board allowed for an early switch from summer- to winter-grade gasoline. Typically, summer-grade gasoline must be supplied through the end of October. The waiver allowed more components that are produced at West Coast refineries to be blended into finished gasoline, immediately alleviating supply tightness. In addition, winter-grade gasoline that meets California specifications is more available globally than the summer-grade equivalent. Summer-grade California gasoline is only produced at a limited number of refineries outside of California, and those refineries are significantly distant, including facilities in Asia and Canada's East Coast. By October 16, wholesale CARBOB prices in Los Angeles had fallen to $2.92 per gallon, a one-cent-per-gallon discount to New York Harbor RBOB.
Retail gasoline prices in California are beginning to follow wholesale prices downward. On October 15, the U.S. Energy Information Administration (EIA) reported the average price for regular retail gasoline was $4.62 per gallon, a four-cent-per-gallon decrease from the previous week. Prices for the West Coast as a whole were $4.39 per gallon. Through the end of 2012, EIA's October Short-Term Energy Outlook projects prices to continue to ease on the West Coast, falling from their current level to average $3.76 per gallon in December 2012.