April 2021

PETROLEUM WATCH CALIFORNIA ENERGY COMMISSION

INSIDE REFINERY NEWS

Gasoline Retail Prices by Brand • Chevron Richmond: • Valero Benicia: Diesel Retail Prices by Region On March 11, an equipment On March 9, the refinery notified malfunction resulted in an ongoing the fire department of an oil Annual Refinery Product Slates flaring event at the refinery. A sheen in Sulphur Springs Creek. and Product Specifications Community Warning System (CWS) Refinery personnel deployed Level 1 was issued (Cal OES). a boom and the sheen was PADD 5 Average Spot Prices contained (Cal OES, Patch). Average Refinery Crack Spreads

Featured Topic: Refinery Slates and Crack Spreads CALIFORNIA GASOLINE RETAIL PRICES BY BRAND

March 2021 vs. 2020 $4.60 (Percentage Change) $4.40 $4.20 76 16% higher $4.00 ARCO 18% higher $3.80 $3.60 Chevron 16% higher $3.40 Hypermart 20% higher $3.20 Shell 15% higher $3.00 $2.80 Unbranded 17% higher $2.60 Valero 17% higher $2.40 Dollars per(Nominal) Gallon $2.20 March 2021 Averages $2.00

76 $3.90 Jul-20 Apr-20 Apr-21 Oct-20 Jun-20 Jan-21 Mar-21 Feb-21 Nov-20 Dec-20 Aug-20 Sep-20 May-20 ARCO $3.64 76 ARCO CHEVRON HYPERMART SHELL UNBRANDED Chevron $4.00 VALERO Hypermart $3.52 Source: California Energy Commission (CEC) analysis of Oil Price Information Service (OPIS) data Shell $3.95 Unbranded $3.70 Valero $3.79

CALIFORNIA DIESEL RETAIL PRICES BY REGION

March 2021 vs. 2020 $4.40

(Percentage Change) $4.20

Northern CA 14% higher $4.00

Central CA 11% higher $3.80 Southern CA 10% higher $3.60

March 2021 Averages $3.40

Northern CA $3.94 $3.20 Central CA $3.79 $3.00

Southern CA $3.93 Dollars per(Nominal) Gallon $2.80

$2.60 Jul-20 Apr-20 Oct-20 Apr-21 Jun-20 Jan-21 Mar-21 Feb-21 Nov-20 Dec-20 Aug-20 Sep-20 May-20

Northern Central Southern Source: CEC analysis of OPIS data

ANNUAL REFINERY PRODUCT SLATES

100% 9.4% 9.2% 9.6% 90% 2.6% 3.2% 2.6% 2.9% 3.1% 3.4%

80% 10.8% 16.2% 15.4%

70%

20.5% 60% 18.4% 18.7%

50%

40%

30% 50.4% 50.4% 53.1% Share of Refinery Production 20%

10%

0% 2018 2019 2020 Gasoline Diesel Jet Fuel Gases Residual Other Products

Source: CEC analysis of Petroleum Industry Information Reporting Act (PIIRA) and U.S. Energy Information Administration (EIA) data

GASOLINE AND DIESEL PRODUCT SPECIFICATIONS

California Air Resources Diesel fuel with sulfur content less than 0.0015 percent. Board (CARB) Diesel Environmental Protection Diesel fuel with sulfur content between 0.0015 and 0.05 percent and Agency (EPA) Diesel diesel fuel with sulfur level no higher than 0.0015 percent.

CARB Gasoline A product that will constitute California gasoline upon the addition of a specified type and percentage of oxygenate to the product after the product has been supplied from the production or import facility at which it was produced or imported. Conventional Gasoline Types of finished gasoline that do not contain any oxygenates (not classified as oxygenated or reformulated gasoline). Includes Arizona Conventional Gasoline and Nevada Conventional Gasoline. Reformulated Gasoline Finished gasoline formulated for use in motor vehicles, the composition and properties of which meet the requirements of the reformulated gasoline regulations promulgated by the EPA.

Source: California code of regulations, TITLE 20, § 1363.1 and California Air Resources Board Chapter 5, Article 1, Subarticle 2, § 2260

PADD 5 AVERAGE SPOT PRICES

$130

$120

$110

$100 Source: CEC analysis of OPIS data $90

$80

$70

$60

$50 Dollars per Barrel Dollars $40

$30

$20

$10

$0 Jul−19 Jul−20 Apr−19 Oct−19 Apr−21 Apr−20 Oct−20 Jan−19 Jun−19 Jan−20 Jun−20 Jan−21 Feb−19 Feb−20 Feb−21 Mar−19 Mar−20 Mar−21 Aug−19 Aug−20 Nov−19 Nov−20 Dec−19 Dec−20 Sep−19 Sep−20 May−19 May−20

CALIFORNIA CRUDE BASKET DIESEL GASOLINE JET

Source: CEC analysis of OPIS and EIA data Notes: California Crude Basket is a weighted price average between Alaskan North Slope (ANS), Brent International, and San Joaquin Valley Crude Oil (SJV) to represent the price of crude oil processed by California refineries. AVERAGE REFINERY CRACK SPREADS

$60

$50

$40

$30

Source per Barrel Dollars : CEC$20 analysis of OPIS and EIA data

$10

$0 Jul−19 Jul−20 Apr−19 Oct−19 Apr−21 Apr−20 Oct−20 Jan−19 Jun−19 Jan−20 Jun−20 Jan−21 Feb−19 Feb−20 Feb−21 Mar−19 Mar−20 Mar−21 Aug−19 Aug−20 Nov−19 Nov−20 Dec−19 Dec−20 Sep−19 Sep−20 May−19 May−20

3:2:1 4:2:1:1 6:3:2:1

Source: CEC analysis of OPIS and EIA data Note: Crack Spread ratios are used to denote how many barrels of refined product are made from a barrel of crude oil. 3:2:1 means 3 barrels of crude oil produces 2 barrels of gasoline and 1 barrel of diesel. Text in the Feature Topic provides more information on the other ratios. FEATURED TOPIC

REFINERY PRODUCT CRUDE OIL DISTILLATION UNITS AND REFINED PRODUCT BOILING RANGES SLATES AND CRACK SPREADS CALIFORNIA REFINERY PRODUCT SLATE

California refineries produce nearly all of the transportation fuels needed to meet statewide demand as well as producing other types of refined products and coproducts. In addition, California refineries produce enough refined productto export roughly 100 million barrels of refined products annually to neighboring states. Annual Refinery Product Slates illustrates the refined Source: EIA petroleum products of statewide spot prices for products sold within refinery output 2018 through 2020, HOW CRACK SPREADS Petroleum Administration Defense referred to as a product slate. SIGNAL MARKET OPPORTUNITY District 5 (PADD 5) and a California Gasoline includes California Air Crude Basket (weighted average of To use an analogy, butchers in the Resources Board (CARB) compliant local San Joaquin Valley, Alaskan beef industry separate cow meat gasoline, conventional gasoline, and North Slope, and Brent International into different cuts based on the other reformulated blendstocks for crude oil prices). PADD 5 Daily intended market’s demand. Butchers oxygenated blending (RBOB). CARB Average Spot Prices shows the in America might separate the cow compliant gasoline and RBOB are relevant product spot prices for 2019 into certain percentages of brisket, unfinished motor gasoline. They through March 2021. Cents per gallon chuck, sirloins, and other popular are blended with ethanol at the fuel is the standard metric for these spot cuts. Other countries proportion the terminals to make finished motor prices but are converted to dollars per cuts of their cows based off what gasoline that is later dispensed barrel for the crack spread formula. is popular in their markets and the at retail stations. Diesel includes Prices for jet fuel and diesel normally type of cattle available to them. CARB diesel, EPA (Environmental stay close to each other, averaging a Similar to a how a butcher decides Protection Agency) compliant diesel, difference of $0.81 per barrel prior to to separate beef into different cuts and other diesel. Gasoline and Diesel the pandemic. With the large reduction based off market demand and Blend Specificationslists some in airline travel since March 2020, the available supply, refineries “cut” their of the properties of the different difference between the two products available crude oil to match their gasoline and diesel specifications. increased to an average of $4.57 respective market’s product demand. per barrel. Demand reduction from The product slate for California Just like a cow cannot be cut into stay-at-home orders affected all three refineries also includes jet fuel and only sirloin or filet mignon, a barrel products, but diesel was the most other petroleum products. Jet fuel of crude oil can only be distilled resistant to the reduced consumption. includes commercial and military into so much gasoline or diesel. jet fuel. Gases includes production This is due to physical limitations Average Refinery Crack Spreads of normal butane, isobutane, and as well as economic feasibility. compares three different possible crack propane. Residual refers to residual spread ratios for California refineries Since crack spreads are an overall fuel oil which is a classification using the above spot price history. indicator of market opportunity, the for heavier oils that remain after Under normal conditions the different industry and analysts that track the distillate fuel oils and lighter ratios stay relatively close together, the market use it to assess refining hydrocarbons are distilled away in however the 3:2:1 spread is weighted decisions. Refiners can reduce their refinery operations. Finally, other more towards gasoline production so risk of price changes in the market by products includes petroleum coke, changes in the gasoline spot price are purchasing crude oil futures contracts, asphalt and road oil, lubricants, and more severe. The 6:3:2:1 and 4:2:1:1 thereby locking in a known price. other miscellaneous products. spreads are nearly identical on the Refiners can also produce different graph as they both include jet fuel Products produced from crude oil crack spread ratios to account for in their product ratios. The 4:2:1:1 sell for different prices on the market changes in consumer demand. For split is also a better fit for California’s and have different margins for example, jet fuel may be selling for refinery profile under pre-pandemic refiners. For example, even though less than the equivalent crude oil plus conditions, when the diesel proportion gasoline has a large margin it would refining cost (producing at a loss) but of the refinery slate was about the not be economically feasible for a refiners continue to produce because same as the jet fuel portion. refinery to produce only gasoline. the average crack spread is still This is because the products positive. Instead of shutting down The 2019 average crack spread for extracted from crude oil have their facilities, they would adjust their California refineries was $21 per different chemical makeups and production ratios to match a crack barrel. During significant refinery densities. Crude Oil Distillation Units spread that yields higher margins. outages in April 2019 and October and Refined Product Boiling Ranges This type of shift occurred last year 2019, the crack spreads jumped into displays the different temperature when the margins for gasoline and the $30 and $40 range. April 2020 ranges for distilling crude oil input jet fuel shrank as reduced demand was when refinery crack spreads into the different refined products. brought down the prices for those dropped significantly (below $5 Thick residual fuel oil would need to products. However, diesel demand per barrel), sparking a reduction be heavily processed to turn it into a stayed relatively constant throughout, in refinery utilization. Compared to light gasoline. The extra processing so prices and margins remained 2019, the average California crack is more expensive and cuts into the steady. Refinersredirected fuel inputs spread was 47 percent lower in 2020, refiner’s margins making it more to produce greater quantities of diesel averaging $14 per barrel using the feasible to sell the product as is. in place of jet fuel. These changes 6:3:2:1 spread. So far in 2021, the in refinery operations successfully crack spreads returned to the $20 per CRACK SPREADS VERSUS allowed the refiners to respond to the barrel level and will continue to rise as REFINING MARGIN market and avoided supply shortages. product spot prices trend upward as well. When crude oil prices increase, Crack spreads are the estimated CALIFORNIA REFINERY so do the spot prices for gasoline refiner margins of refining a barrel CRACK SPREADS and other refined products, which of crude oil. Specifically, it is the ultimately raises the crack spreads. difference between the price of The 6:3:2:1 crack spread ratio best crude oil refiner’s pay and the spot represents the California refinery REFINERY IMPLICATIONS OF CRACK price of the petroleum products market (6 barrels of crude oil SPREADS AND PRODUCT SLATES they sell. The most common becomes 3 barrels of gasoline, 2 spread calculation uses a 3:2:1 barrels of diesel, and 1 barrel of Crack spreads serve as a gauge for ratio, meaning for every 3 barrels jet fuel). Accounting for the jet fuel maximizing refiner returns on crude oil of crude oil, the refiner produces in California’s market is important barrels, however the product demand 2 barrels of gasoline and 1 barrel since California is the top consumer by consumers determines how a refiner of diesel. The refining margin, of jet fuel of the states. Since these decides to “cut their cow.” Retail although similar, only takes the formulas do not account for refining gasoline prices have already returned difference between the total revenue costs, other fees, and the production of to what they were pre-pandemic, of a refinery’s product sales and other petroleum products; they should which is a signal for rising demand. the total cost of crude oil to make still be taken as an estimation of a Additionally, California’s reopening goal such products. The crack spread refinery’s margin per crude oil barrel. is set for June 15, so refineries should accounts for the different volumes be adjusting their production slates to The formula to represent California of refined product by using a accommodate the expected increase Refinery crack spreads uses product weighted average for product sales. in gasoline and jet fuel demand.

Gavin Newsom Karen Douglas, J.D. CALIFORNIA Governor Siva Gunda ENERGY J. Andrew McAllister, Ph.D. David Hochschild Patty Monahan COMMISSION Chair Commissioners Drew Bohan Executive Director FOR MORE INFORMATION Instagram California's Petroleum Market Twitter LinkedIn Weekly Fuels Watch Subscribe

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