Kickoff to Summer Driving Season
Many factors affect available US gasoline supply, and ultimately wholesale/retail gasoline prices. The summer driving season, from Memorial Day to Labor Day, can worsen the impact of supply disruptions. This can also lead to higher and more volatile prices surrounding any supply uncertainty. As schools let out for summer break and family vacations begin, miles driven and levels of gasoline consumed grow to the highest levels of the calendar year.
Traditionally, vehicle miles driven during this period gradually increase, with a crescendo on or around the July 4th weekend. A steady decline occurs as the summer season ends. Conversely, January and February are the weakest period of gasoline consumed, and the lowest period of vehicle miles driven. Prices tend to be at their lowest, during the low demand period, and rise heading into the summer driving season.
Unplanned or unexpected supply disruptions, usually weather related, can have the greatest short-term impact to price and supply. These can also lead to longer-term disruptions, usually dependent on the status of gasoline inventory prior to the event, such as the polar vortex of 2021. If gasoline supplies are already tight it can spread beyond a regional event quickly as production and distribution systems across the US are closely intertwined.
Planned supply disruptions can and try to be well-planned in an attempt to avoid major supply disruptions. Planned disruptions can include refinery maintenance, terminal tank inspections, pipeline integrity checks, and seasonal product transition. Refinery turnarounds happen roughly every 4-5 years, and traditionally outside of peak gasoline demand.
When planned disruptions are combined with unexpected supply events, supply distortions and short-term supply disruptions can occur. More commonly with planned events, the maintenance does not go as expected, extending the supply disruption beyond plan or trade expectation.
Available supplies of gasoline tend to be at higher levels during low demand periods, and at lower levels during the high demand periods (US Gasoline Stocks). Gasoline stock building during winter months is a pretty common occurrence. This only lasts so long before refiners, pipelines, terminals, and suppliers are required to move from winter grade gasoline (high RVP) to a summer grade (low RVP).
High RVP (Reid vapor pressure) is more evaporative, helping cars to start better in the colder weather. During the heat of the summer, low RVP is more desirable as it is less evaporative. This leads to less smog and emissions. US EPA defines April to June as the “transition season.”
The annual blend down of RVP causes terminal operators to deplete or minimize inventory levels to meet the EPA regulated RVP requirements by May 1. Subsequently, retailers can reach these same requirements by June 1. Refiners need to start making summer blends as early as mid-February, following a gradual RVP blend down schedule.
This can be rather complicated as everyone in the supply chain is trying to ensure regulatory compliance, while not creating supply shortages leading into the high demand period. It is not uncommon for terminal supplies to be relatively low post the “transition season”, potentially leading to short-term supply disruptions.
At the end of the US EPA low RVP season, around September 15, refiners begin gearing up to make higher RVP gasoline leading into winter gasoline season. Low RVP gasoline takes longer to produce, and the yield (amount produced from a barrel of oil) is less than a winter grade gasoline. These complexities add cost to the finished product and can mean there is less gasoline being produced during the summer driving season at a higher cost.
Because it is more costly to produce and yields less volume, gasolines stocks tend to dwindle towards the end of the summer driving season. If coupled with an unplanned supply event, such as a hurricane in the Gulf Coast, this can create larger supply disruptions. Prices increase temporarily to balance supply and demand when there is a shortage in the market.
Lastly, market dynamics can also hinder or distort supply availability. Poor refinery economics or unfavorable market structure can limit the amount of gasoline being produced, similar to what occurred in 2020. The amount of inventories willing to be held by the supply and trading community is also limited. Poor refinery margins are usually a result of adequate short-term supplies, while a backward market structure usually reflects higher levels of demand and less available supply (CME-backwardation-contango definition).
Many factors are at play in delivering that final gallon of gasoline at the terminal or to the pump. Disruptions are part of the process, but knowing some of the factors helps you prepare to better supply your customers. This knowledge also provides an appreciation of the fuel supply chain when fueling your car this summer.