Gasoline prices have been falling sharply in the past month, and the latest comments from
BP
show why they could keep going down.
Average gasoline prices have fallen to $3.48 per gallon from $3.82 a month ago, according to AAA. What’s particularly interesting about the drop is it comes as oil prices have stayed high, amid the Israel-Hamas war and ongoing production cuts by OPEC.
The main reason for the price decline comes at the refinery level, where crude oil is turned into gasoline. Refineries have been making too much gasoline even as people in the U.S. and elsewhere are using less of it. In some cases, refineries are actually losing money on the gasoline they produce, because the wholesale price they sell it for doesn’t make up for the cost of producing it. They’re still willing to make it, however, because they’re still making large margins on products like diesel and jet fuel. For most refineries, there’s no way to make diesel and jet fuel without also making gasoline, given the design of the plants.
In an otherwise disappointing third-quarter earnings report Tuesday, BP (ticker: BP) posted relatively strong results in its refining segment. But interim CEO Murray Auchincloss said on the company’s earnings call that the supply of gasoline has been outpacing demand. He also said diesel is now in oversupply too.
“We’ve seen an oversupply as we moved into late August, September and now October,” he said. “And that’s why you’ve seen the gasoline and diesel cracks moving down pretty significantly.” Cracks are a measurement of margins that refiners make.
Recently some refineries began to sell wholesale gasoline for less than $2 a gallon, a key price level that could eventually take prices at the pump in some states down below $2.50, according to Tom Kloza, global head of energy analysis at OPIS.
“Retail gasoline will definitely move lower in the next week or two,” he wrote in an email to Barron’s. He predicts that “gasoline will flirt with being a glut from now into midwinter.”
The question now is whether refiners start to cut back on production to help prop up prices. Kloza says the key turning point could come in about three weeks when refiners begin to restart refineries that had been closed for seasonal maintenance. If they reduce fuel capacity, it could cause prices to rise again.
Auchincloss also reminded investors that global refinery capacity hasn’t grown much in recent years, leaving the industry vulnerable to any outages.
“There is not much excess capacity for gasoline and diesel around the world right now, given the refineries that have shut down,” he said. “So if we have outages, then all of a sudden prices start to increase. So I think calling that part of the business is as difficult to call as calling the oil price now.”
Write to Avi Salzman at [email protected]
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