Journally Speaking: Crack spread, pump prices drop

Nov. 7, 2023
US gasoline prices are gradually falling as the end of the summer driving season moves demand down despite the Israel-Hamas war.

US gasoline prices are gradually falling as the end of the summer driving season moves demand down despite the Israel-Hamas war. Pump prices have dropped $0.25/gal from September’s average of $3.845/gal—the highest pump price so far this year, according to OGJ’s weekly gasoline price survey. The most recent drop as of press time, saw US pump prices for the week of Oct. 25 decline $0.05/gal to an average $3.543/gal from the previous week.

Gasoline prices continue a downward trend despite Hamas’ attacks in Israel. Oil prices increased slightly following the initial Oct. 7 attack, but not to the degree seen when Russia, a major oil producer, invaded Ukraine and sent oil prices soaring over $100/bbl in first-half 2022. For the week ended Oct. 20, 2023, the West Texas Intermediate (WTI) 1-month future price averaged $87.95/bbl, a 3% increase over the previous week when Israeli tension intensified. Oil markets will remain attentive, watching for escalation between Israel and Hamas and for potential spread of the conflict outside of the current borders.

Crack spreads

Refiners shifting to winter-grade fuels and lower gasoline demand have led to a decline in crack spreads. The US Energy Information Administration (EIA)’s New York Harbor RBOB-Brent crack spread serves as an indicator of gasoline market supply and demand conditions. It declined to $0.70/gal end-August after a summer high of $0.94/gal on July 27 and subsequently plummeted in September to $0.17/gal. Should October spreads remain unchanged from September, the month would see the lowest monthly average since December 2020.

Higher gasoline stocks and lower gasoline demand contributed to declining crack spreads this fall. US inventories for finished motor gasoline for the week ended Oct. 20—the last week prior to publication—were 223.5 million bbl, an increase from this year’s lowest stock level of 214.7 million bbl recorded Sept. 1. Lower demand for motor gasoline and higher refinery runs led to the increase in gasoline inventory this fall. Gasoline demand for the week ended Oct. 20 was down slightly from the week before but down 7.6% from the high of 9.599 million b/d on June 30 during the peak of driving season and down 4.9% from the 9.321 million b/d demand Sept. 1 as consumers were wrapping up summer travel.

“US gasoline consumption, measured as product supplied, has been below the low levels seen both in 2022, when demand was down after months of high summer gasoline prices, and inflation, and in 2020, when responses to the COVID-19 pandemic reduced demand,” the EIA said.

The switch to winter grade fuels has also caused crack spreads to fall. During cooler weather, refiners must formulate gasoline blends for different product specifications to include “reduced pollutants (such as sulfur and benzene) and specifications related to the fuel’s volatility (rate of evaporation) and octane ratings. Because evaporative emissions are lower in cooler weather octane specifications for winter-grade gasoline can be met using less expensive and more volatile blending components, such as butane,” according to the EIA.

The blending components required for summer-grade gasoline cost refiners more to process than the butane blend and other components required to refine winter-grade fuel, leading to lower gasoline prices.

Renewable identification number (RIN) prices played a less significant role in decreased gasoline crack spreads than in lower gasoline prices. Ethanol RIN fell by $0.49/gal from Sept. 1 to Oct. 17. According to the EIA, a gallon of gasoline contains about 10% ethanol and each RIN represents one gallon of ethanol, which lowers RBOB prices by about $0.05/gal.