Despite the fact that oil prices are trading far from their all-time highs, consumers in the state of California could not tell you the difference. WTI spot prices trade around $90 per barrel, a far cry from all-time highs of $147.
At the same time, the price of gasoline hit new all-time highs of $4.668 per gallon in California, according to AAA. Prices are almost $1 higher than the nation-wide average of $3.79 per gallon.
Refinery and transmission issues
The gasoline market in California has been quite tight for a while already. On August the 6th, a fire at Chevron's (CVX) refinery in Richmond put the State's third largest refinery at reduced capacity. Industry observers estimate that the refinery runs at 60% of its total capacity of 245,000 barrels per day. The same fire also hit a pipeline which transports oil to the Northern part of the state.
The latest uptick in gasoline prices, almost 20% over the past week, was caused by a power outage at one of Exxon Mobil's (XOM) refineries. Exxon's refinery in Torrance went offline last week on Monday as a result of a power failure, and only came back online on Friday. The refinery with a capacity of 149,500 barrels per day has been down the entire week, pushing gasoline prices up.
In total, the outages at Chevron's and Exxon's refineries took more than 10% of California's 2 million barrels of refining capacity offline. Analysts are hopeful that if the Torrance refinery comes back online, prices are going to fall back, although they highlight the fact that price reductions at a wholesale level can take a few days to trickle down and impact retail prices.
Regulation and Consolidation
California has traditionally had higher gasoline prices. The strict environmental restrictions require refineries to produce a special blend of cleaner gasoline from April to October.
The California Independent Oil Marketers Associations pushed for a waiver, allowing gas stations to sell winter-blended gasoline earlier this year. However, this creates problems as well. Switching of production of blends requires refineries to re-start their operations, something not really optimal in the current situation. On Monday, the Air Resources Board allowed refiners to allow to switch earlier towards winter-blend which should lower gasoline prices by fifteen to twenty cents per gallon, as input costs are cheaper.
At the same time, significant consolidation has taken place in California's refining landscape. The number of refineries has fallen to just 15 at the moment. Consequently, a power outage, fire, or unexpected maintenance has a much greater impact on the regional supply/demand situation.
Furthermore, the market has been tight already this year with gasoline inventories hitting their lowest levels in 10 years. Any impact on supply leads to price exaggerations when inventories are this low.
Closed Gas Stations
Over the weekend, some gas stations decided simply to run out of gas, rather than taking a risk of getting stuck with costly inventory if customers refused to fill up their cars over the weekend. A lot of gas stations of retail store operator Costco Wholesale (COST) ran out of gas last week on Friday.
Many drivers say that high prices are already impacting their decisions. Families are cutting back on discretionary driving and are searching for smaller, fuel-efficient cars. Furthermore, many drivers are filling up their tank by just half or a quarter of its capacity. Gasoline prices have jumped as much as 70 cents over the time span of just a week, pushing retail prices over $5.00 per gallon in some areas.
Commentators are hopeful that wholesale and retail prices will fall back later this week after Exxon's Torrance refinery came back online on Friday. Fortunately, for consumers in California, this means that we would not have to see inflation-adjusted records of $4.94, set in 2008.
Energy companies with large refining operations in California have seen their shares surge already over the last couple of months. Over the past three months, shares of Valero (VLO) have returned 30%, while Tesoro (TSO) is trading up 67%. Tesoro became the state's largest refiner after the company bought BP's (BP) Carson Refinery.
Investors should do their homework and not simply invest based on the short-term tight market conditions, although volatile prices might be beneficial for some energy companies. Some refiners, including Valero and Tesoro have stopped selling gasoline to customers without binding contracts, further driving up spot prices. Excess production surplus, after supplying suppliers with contracts, could then be sold at higher spot prices. In general, the situation ought to be good for refiners which are not plagued by outages or maintenance issues at their Californian refineries. Furthermore, those who have excess production to sell at spot markets at sky-high prices, stand to benefit.
Given the uncertainty regarding the Californian gasoline crisis, investors should still like their investment, irrelevant of the current events, as the market could be restored to "normal" in matter of days. This is the reason why I initiated my long position in Tesoro to begin with. A longer duration of the distorted market conditions might just act as an extra bonus in the meantime.
Disclosure: I am long TSO.