Joe Biden let the veil slip Monday, telling reporters gathered at a press conference in Tokyo that unaffordable gas prices in the U.S. are part of a deliberate “transition” to green energy.
Suddenly, Vladimir Putin isn’t to blame anymore as a reporter asked if a U.S. recession is unavoidable.
Two weeks ago ZeroHedge reported how the “steepest decline in global oil consumption ever recorded” spelled negative prices for crude in what Goldman’s Jeffrey Currie as “the largest economic shock of our lifetimes.”
Now, the unprecedented collapse in consumption has hit the other end of the industry – gasoline.
According to Bloomberg, gasoline in Fargo, North Dakota has hit 12 cents a gallon at ‘the rack’ – the wholesale market where gas station owners buy fuel before marking it up at the pumps – which have become “little more than makeshift storage for ballooning inventories.”
“When you see gasoline down around 12 cents a gallon, no one is going to be making money,” said Ron Ness, President of the North Dakota Petroleum Council, who added that it’s nearly impossible for retailers to turn a profit at that price.
“Our gasoline business has been cut in half,” said David Olson, general manager of RJ’s Gas Station outside of Fargo. Nearby, Shaun Lugurt told Bloomberg that he estimates sales at his station have tumbled 80% in a month.
“The biggest part for us that has been so hard is the unknown,” said Lugurt, adding “It’s been kind of a roller coaster.” Lugert co-owns Don’s Car Washes, and has also been forced too cut back store and worker hours.
The slump in rack prices, which are typically stable due to intense competition among distributors, is the latest sign that the coronavirus pandemic is wreaking havoc on every aspect of the fuel market. American gasoline consumption fell to the lowest level on record last week as lock downs take drivers off the road while gasoline stockpiles rose to a record high. That’s caused rack prices across the U.S to collapse. Milwaukee this week beat out Fargo for the lowest price in the nation. –Bloomberg
“The local racks are just inundated with material,” according to Patrick De Haan, head of petroleum analysis at GasBuddy – who suggested that some refineries may be selling gasoline “at a break even or even a loss.”
“What we are seeing is that a lot of the big pipelines are being used as storage, and the product will just get pushed and pushed until it has no place else to go,” said DTN refined products analyst, Brian Milne. “Those places are at the end of the line.”
Retail gas prices, meanwhile, are catching up.
“You’re not going to be able to flip a switch and go back to what it was before coronavirus,” said Olson, the station manager at RJ’s. “Even with businesses opened back up again, people are going to be apprehensive.“
Olson is probably right – as a recent Gallup poll found that 80% of Americans say they will wait to return to normal activities after the government lifts the nationwide coronavirus lock down.
In addition to earthquakes, wildfires, power outages and an army of pooping homeless people, California is known for ridiculously high gasoline prices – thanks in part to the state’s notoriously exorbitant taxes.
And in the wake of $6.00 gasoline in some parts of the state, Governor Gavin Newsom has asked Attorney General Xavier Becerra to investigate “If oil companies are engaging in false advertising or price fixing,” according to KCRA, after a new report suggests that big oil companies are overcharging customers by as much as $1 per gallon.
Name brand retailers – including 76, Chevron and Shell – often charge more because they say their gasoline is of higher quality. But a new analysis from the California Energy Commission could not explain the price difference, concluding “there is no apparent difference in the quality of gasoline at retail outlets in the state.”
The commission said California drivers paid an average of 30 cents more per gallon in 2018, with the difference getting as high as $1 per gallon in April of this year. The result is California drivers paid an additional $11.6 billion at the pump over the last five years. –KCRA
That said, according to an April report in the Orange County Register, at $4 per gallon, approximately .98c of it is due to various taxes and fees.
- Federal excise tax — 18 cents
- State excise tax — 42 cents
- State and local sales tax — 8 cents
- State underground storage tank fee — 2 cents*
- Additional costs for compliance under Cap & Trade, as well as the Low Carbon Fuels Standard— 28 cents
- Total — 98 cents
* Note: The state and local sales tax is calculated at an average state sales tax rate of 2.25% percent although actual sales tax rates vary throughout California.
That said, “Severin Borenstein, a professor at UC Berkeley’s Haas School of Business and faculty director of the Energy Institute at Haas, said his own tax calculations came within a penny of that total. But the mystery surcharge — an added expense that has yet to be identified — has averaged 28 per cents a gallon from January through March of this year. When added to the taxes, that brings the total to about $1.26 a gallon,” according to the report.
“In January, a group of 19 state legislators sent a letter to the California Attorney General’s Office saying, ‘We want you to investigate this,’” said Borenstein, who added. “They have never replied. They said they don’t make public statements about investigations. We don’t even know if they are investigating it.”
So while California’s AG has been asked to investigate false advertising and price fixing by the oil companies, Newsom’s letter is devoid of any request to look into the mystery surcharge found by Borenstein.
RBOB Gasoline futures jumped overnight, accelerating their recent ascent ever since the explosion and massive inferon at the Philadelphia Energy Solutions (PES) plant, following a Reuters report that the largest east coast refinery is expected to seek to permanently shut its oil refinery in the city after a massive fire caused substantial damage to the complex.
Shutting the refinery, the largest and oldest on the U.S. East Coast, would result in not only hundreds of lost jobs but also sharply higher gasoline prices as gasoline supplies are squeezed in the busiest, most densely populated corridor of the United States.
PES is expected to file a notice of intent with state and federal regulators as early as Wednesday, setting in motion the process of closing the refinery, the sources said.
The refinery, which could still change its plans, is also expected to begin layoffs of the 700 union workers at the plant as early as Wednesday, Reuters reported. The layoffs could include about half of the union workforce, with the remaining staff staying at the site until the investigation into the blast concludes.
As reported previously, the 335,000 barrel-per-day (bpd) complex, located in a densely populated area in the southern part of the city, erupted in flames in the early hours on Friday, in a series of explosions that could be heard miles away and which some compared to a meteor strike or a nuclear bomb going off.
The cause of the fire was still unknown as of Tuesday, though city fire officials said it started in a butane vat around 4 a.m. (0800 GMT). It destroyed a 30,000-bpd alkylation unit that uses hydrofluoric acid to process refined products. Had the acid caught fire, it could have resulted in a vapor cloud that can damage the skin, eyes and lungs of nearby residents.
Prior to the massive inferno, the refinery had suffered from years of financial struggles, forcing it to slash worker benefits and scale back capital projects to save cash. It went through a bankruptcy process last year to reduce its debt, but its difficulties continued as its cash on hand dwindled even after emerging from bankruptcy in August; some have speculated that cost cutting resulted in the structure becoming fragile and susceptible to accident.
After bankruptcy, Credit Suisse Asset Management and Bardin Hill became the controlling owners, with former primary owners Carlyle Group and Sunoco Logistics, an Energy Transfer subsidiary, holding a minority stake.
Last Friday’s blaze was the second in two weeks at the complex, spurring calls from Philadelphia’s mayor for a task force to look into both the cause and community outreach in the wake of the incidents. A spokesperson for Mayor Jim Kenney declined to comment on the potential closure of the plant.
That may be difficult as investigators on the scene are said to be dealing with unstable structures that need to be certified by engineers, slowing down the inquiry, city officials said. The investigation could ultimately take months or perhaps years. Additionally, the state Department of Environmental Protection said they have concerns about the integrity of storage tanks on site, the agency said on Tuesday. The U.S. Chemical Safety Board is also investigating the incident, according to Reuters.
While none of this will make much news outside of Philly, what will impact all East Coast drivers is that gasoline futures rose as much as 5.4% on Wednesday to $1.9787 a gallon, the highest since May 23. The front month price was at $1.945 early on Wednesday.
Futures are up 8.9% since Thursday’s close.
NY Gasoline prices have surged back into a premium over US Gulf Gasoline…
All of which will drag, as always with a lag, the price of gas at the pump notably higher…
The rally in U.S. gasoline futures has pushed U.S. gasoline prices above European and Asian markets, raising the prospects for US imports. According to Matthew Chew, oil analyst at IHS Markit, “chances are that (the wider price spread) could open up the arbs between U.S. Gulf/Europe and [the East Coast] PADD 1.”
Consumers, who are already being squeezed by rising interest rates (even as the return on their cash deposits remains anchored near zero), are facing another potential constraint on their already limited purchasing power. And that constraint is rising gasoline prices, which, as we pointed out last month, could erode the stimulative impact of President Trump’s tax plan as rising prices sop up what little money the middle class is saving.
As prices rise and banks scramble to update their forecasts, the Wall Street Journal has become the latest publication to sound the alarm over what is, in our view, one of the biggest threats facing the US economy in the ninth year of its post-crisis expansion.
In its story warning about $3 a gallon gas (of course, we’re already seeing $4 a gallon in parts of California and other high-tax states), WSJ cited Morgan Stanley’s latest projection that rising gas prices could wipe out about a third of the annual take-home pay generated by the tax cuts.
Rising fuel costs can also feed inflation and pressure interest rates. Even though the Federal Reserve typically looks past volatile energy prices in the short term, higher energy costs help shape consumer confidence. And with the central bank poised to be more active this year, rising energy costs pose an additional risk to the economy.
Morgan Stanley estimates that if gas averages $2.96 this year, it would take an annualized $38 billion from spending elsewhere, an upward revision from the bank’s $20 billion estimate in January. That would wipe out about a third of the additional take-home pay coming from tax cuts this year, the analysts said.
…
Patrick DeHaan, petroleum analyst at GasBuddy”Three dollars is like a small fence. You can get through it, you can get over it,” said Patrick DeHaan, petroleum analyst at GasBuddy, a fuel-tracking app. “But $4 is like the electric fence in Jurassic Park. There’s no getting over that.”
Of course, MS’s take appears downright pollyannaish when compared with a Brookings Center report that we highlighted last month.
The left-of-center think tank, which of course has every reason to hope that the next recession will materialize on President Trump’s watch, projected that consumers would soon spend about half of the money saved from tax cuts on fuel costs.
And in a report published in April, Deutsche Bank illustrated how rising fuel costs will disproportionately squeeze the most vulnerable among us – a cohort of consumers who already shoulder an outsize share of the country’s household debt.
The FT put it another way…
As the chart above shows, middle-income families – aka the engine of consumption – will be the hardest hit by rising gas prices.
Indeed, small business owners in California, where gas prices are the fifth highest in the nation thanks to taxes and stringent emissions standards, say they’ve seen their energy bills shoot higher in the past few months. Car salesmen say consumers are asking more questions about mileage, according to WSJ.
Robert Lozano, a car salesman in Los Angeles where some gas prices are already above $4, said the dealership’s gas bill has climbed from about $9,000 to about $12,000 a month recently.
Customers are inquiring more about electric vehicles, he said.
“It’s more in the consumer’s mind as to what the most efficient vehicle is.”
With oil already at $70 a barrel, early indicators imply that the summer driving season could see an unusually large spike in demand for gas…
…As the number of Americans intending to take vacations in the next six months climbs to its highest level in decades.
Heightened vacation intentions suggest the number of vehicle miles driven will also climb (because people tend to travel greater distances when they go on vacation). As the chart below shows, fluctuations in miles driven – a close proxy for gas demand – are quickly reflected in prices at the pump.
While the US’s increasing prominence in the oil-export market could soften some of the economic blow as the energy business booms, other large business from airlines to shipping companies would feel the pinch at a time when costs are already rising.
But some economists say the growing importance of energy to the U.S. economy could blunt some of the impact from rising oil prices.
The country has become a more prominent supplier of crude oil and fuel. Domestic production has reached record weekly levels of 10.7 million barrels per day and a lot of it is being exported.
[…]
“People don’t understand how we could double crude oil production” and see higher gas prices, said Tom Kloza, global head of energy analysis at the Oil Price Information Service. “The answer lies in the balance of payment. We are an exporting power right now.”
[…]
Airlines and shipping companies will also be paying more for jet fuel and diesel – costs that may be passed along to consumers. Even companies such as Whirlpool Corp. have noted that higher oil prices have boosted the cost of materials.
Refiner Valero Energy Corp. said it wouldn’t expect consumer demand to drop off until oil prices are at $80 to $100.
But demand is only one factor driving up oil prices. Supply issues have also weighed on oil traders’ minds. Traders pushed oil prices higher as the US pulled out of the Iran deal as some worried that it could impact global supplies (though, as we’ve pointed out, there are plenty of other buyers waiting to step in and buy Iranian crude). Even if the Iranian crude trade isn’t impacted by sanctions, plummeting production capacity in Venezuela could ultimately have a bigger impact on global supply.
Conflicts in other oil producing regions could also impact supplies, pushing prices higher.
Last week, Bank of America became the first Wall Street bank to call $100/bbl for Brent crude (at the time, it was trading around $77/bbl) in 2019. That could send prices to highs not seen since 2008. Other banks have been scrambling to raise their forecasts as well.
With the Fed changing its language in its latest policy statement to reflect rising inflation expectations, rising oil prices could also inspire the Fed to hike interest rates more quickly for fear that the economy might overheat. That could result in four – or perhaps five – rate hikes this year.
The resulting effect would be like economic kudzu strangling the buying power of consumers and possibly forcing a long-overdue debt reckoning as millennials, who are already drowning in debt, are forced to put off home ownership and family formation until they’re in their late 30s or even their 40s.
During the two weeks since my previous update, stocks in the Oil & Gas sector demonstrated what an optimist might interpret as “stability at the bottom.” The net effect of another sequence of high-amplitude intraday moves was a slight recovery from the two weeks ago levels across the vast majority of segments and stock groups, as shown on the chart below. It should be no surprise that those groups that had declined the most were also the biggest gainers in the past two weeks.
Most notable is the fact that the descend trend in the Oil & Gas stocks was interrupted (and even marginally reversed) in spite of the new lows posted by the price of oil. One could try to interpret this performance as an indication that the current price levels already discount the market’s fear that the oil price paradigm has shifted. This stability may also indicate that the wave of forced liquidations by hedge funds and in individual margin accounts has run its course and the worst part of this correction may be already behind us.
Even though this recent stock price “stability” is a welcome development, it provides little consolation to investors in the Oil & Gas sector who still see their positions trading far below the peak levels achieved last summer. The correction scorecard graph below summarizes average “peak-to-current” performance by individual stocks that are grouped together by sector and size. Individual stock performance is provided in full detail in the spreadsheets at the end of this note.
Mid- and small-capitalization stocks, in both Upstream and Oil Service segments, remain the worst performing groups, now trading at an average discount to each individual stock’s recent peak price of over 40%, a staggering decline. Large-capitalization E&P independents and large-capitalization oil service stocks are trading at a 20%-24% average discount.
Emerging markets Oil Majors were one of the worst performing categories during the past two weeks:
Petrobras (NYSE:PBR) continued to slide down, moving 12% down since my previous update. Petrobras stands out as one of the most disappointing Oil Majors in terms of stock performance in the past five years, having lost a staggering three-quarters of its value during that period. The company’s market capitalization currently stands at only $62 billion.
· Lukoil (OTCPK:LUKOY) and Petrochina (NYSE:PTR) are other examples of strong declines in the past two weeks, with the stocks losing 8% and 7%, respectively. Lukoil’s performance may in fact be interpreted as “solid,” given the continued deterioration of Russia’s political and credit risk.
A strong contrast is the performance of the three oil super-majors – Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Shell (NYSE:RDS.A) – that gained ~2% during the past two weeks and remain the best performing group in the Oil & Gas sector. I have argued in my earlier notes that, given the combined $0.9 trillion market capitalization of these three stocks, the resilient performance by the Super-majors has effectively isolated the correction in the Oil & Gas sector from the broader markets. From a fundamental perspective, the Super-majors are characterized by very low financial leverage, high proportion of counter-cyclical production sharing contracts (“PSAs”) and the effective hedge from downstream assets, which limits their exposure to the oil price decline.
After a dramatic underperformance, small- and mid-capitalization E&P stocks posted meaningful gains in the past two weeks. However, in most cases the recovery is “a drop in the bucket,” given that high-percentage moves are measured off price levels that sometimes are a fraction of recent peak prices. The sector remains a menu of bargains for those investors who believe in a recovery in oil prices.
Upstream MLPs were one of the exceptions in the E&P sector, declining by an average of 4% in the past two weeks. The largest Upstream MLP, Linn Energy (NASDAQ:LINE) and its sister entity LinnCo(NASDAQ:LNCO), are again trading close to their lows, after having enjoyed a strong bounce a month ago. The previously very wide gap in relative performance between Upstream MLPs and other Upstream equities has contracted substantially which, arguably, makes sense given that both categories of companies participate in the same business, irrespective of the corporate envelope.
Easy Money 