Fuel Flash – April 2021

Following a rapid climb in February, oil prices lost their momentum in March.  Despite some volatility during March, prices ended the month at just over $59 per barrel which was about a dollar lower than where the month started. The following graph shows the daily price movements over the past three months:

Oil prices had increased significantly during February primarily due to the continued roll out of COVID vaccines and a decline in the rate of new cases.  As March began, setbacks emerged as virus numbers began rising again in some countries.  Oil prices briefly fell in the first few days of March based on concerns that an economic recovery could be further off than what had been anticipated.  However, prices were then given a boost when OPEC+ unexpectedly announced the group would continue their oil production restrictions while most analysts expected some easing to occur.

By the middle of the March, oil prices quickly declined by 10% as more significant setbacks occurred with the vaccines, particularly in Europe.  A new wave of global cases started to grow, and some countries began to implement travel lockdowns again.  For the remainder of the month, prices traded in a narrow range near $60 per barrel as traders waited for signs that the situation would get better or worse.

Despite the volatility in oil prices during March, the overall average price for the month was modestly higher than February.  For refined fuels, average prices rose significantly higher compared to the prior month.  The underlying increase in oil prices contributed to this, but a big factor was the lingering effect of the February storms in Texas which caused widespread disruptions to fuel refining and distribution.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

Taking a closer look at the increase in refined fuel prices versus oil, the 3-2-1 crack spread in the graph below reflects much higher margins that refiners earned in March because of tighter fuel supplies resulting from the disruptive storms.  As a refresher, the 3-2-1 crack spread is based on a rough calculation that three barrels of oil can be refined into two barrels of gas and one barrel of diesel fuel.

Although there were significant increases in refined fuel prices in March, wholesale prices did not go up quite as fast as retail.  Wholesale fuel prices are more closely tied to the underlying cost of oil.  Wider margins are typical during periods of declining oil prices which occurred during the second half of March.  The growth in retail margins provided a recovery toward their more typical levels.  The following graph shows the retail margins over the trailing 15 months: 

As fuel prices have recently fallen and settled in the $60 per barrel range, future price movements will continue to be heavily influenced by COVID vaccine and case numbers.  In addition, OPEC+ will meet again in April to reevaluate their production restrictions, but it is likely they will hold steady until more consistent demand growth is seen for the future.  Until then, Sokolis Group believes prices will remain close to $60 per barrel in the near term.  Looking further out, assuming progress is made to curtail the newest wave of global virus cases, there is greater potential for prices to resume rising through the $60’s and approach $70 rather than fall further into the $50’s.

Fuel Flash – March 2021

Oil prices soared 18% higher in February, starting the month near $54 per barrel and ending just under $62.  Prices have increased almost 30% since the start of the year and are almost 40% higher compared to the same time last year. The following graph shows the daily price movements over the past three months:

Following a flat trend in January, oil prices rose quickly in February as COVID vaccines continued to roll out and the number of new cases began to decline.  As the middle of the month approached, unusually severe back-to-back winter storms resulted in treacherous travel conditions and extended power outages throughout Texas.  The storms and power outages caused significant disruptions to oil production, fuel refining, and distribution resulting in a sudden decline in supply from the area.  Oil and fuel prices increased throughout the US due to the impact on the supply chain.

In addition to the US domestic supply disruptions, OPEC+ had already been limiting their production in response to an extended period of weakened global demand for oil caused by COVID.  Meanwhile, demand for oil and fuel (primarily diesel) had been growing over the past few months.  Growing demand with restricted supply resulted in rapidly increasing prices.  However, by the end of February, rising prices stalled as supply from Texas began to slowly come back online.

Due to the rapid increase in oil prices during February, the overall average price for the month was higher compared to the prior month.  Wholesale and retail prices for refined fuels also moved higher.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

Retail prices for fuel did not increase as fast as wholesale prices in February which caused retail margins to decline.  For gas, it was the fourth straight month of declines and margins have become very tight.  Gas retailers have struggled to limit their price increases to stay competitive during a time when demand hasn’t fully rebounded from the impact of the pandemic.  The following graph shows the retail margins over the trailing 15 months:

Although fuel prices have increased much faster than previously anticipated, Sokolis Group believes the pace will slow down.  Oil will likely remain above $60 per barrel with the potential to approach $70 as demand continues to grow due to improved mobility from the vaccine rollout.  However, supply in Texas should normalize throughout March and the warmer spring temperatures will reduce demand for heating oil.  In addition, when OPEC+ meets again in March, the group could likely decide to begin loosening their production restrictions which would bring more supply to the market.