Diesel prices in the west coast of the US – much like various mountain states – have recently behaved relatively independent of national price trends. Unpredictable events in this region are exacerbated by the lack of pipeline connectivity to other regions, which could otherwise feed product to minimize the price impact of supply constraints. At the heart of this disconnect lies California, who remains subject to significant price swings and pronounced volatility depending not only on upstream oil market fundamentals, but also the downstream stages of the petroleum supply chain that often impact the cost of fuel used to move goods to market.
Numerous refinery disruptions in recent weeks have materialized into diesel price pressure in the Los Angeles/West Coast spot market, primarily in California, as stressed refinery capacity has affected diesel supply in many of the region’s demand centers. The chart below supports this behavior, highlighting each spot market’s basis differential – a key indicator of real-time market fluctuations. This indicator reveals that a swift uptick in California diesel prices can be expected, so long as diesel production remains constrained.
2019 Diesel Fuel Price Behavior
Since the end of April, California’s average wholesale diesel prices have climbed approximately 15 cents per gallon, and nearly 40 cents per gallon since the state’s refinery struggles first began in mid-March. The recent price surge marks the largest diesel basis differential in the West Coast market in over seven years.
The root cause of this behavior is tied directly to unplanned refinery outages throughout California’s production landscape, impacting upwards of 20 percent of the state’s total refined product production. The Phillips 66 refinery in Carson suffered a fire at one of its primary distillation units, marking the second fire at this facility in a two-month timeframe. The supply impact of this outage was compounded by ongoing maintenance at Valero’s Benecia refinery in the San Francisco area, creating a supply gap of approximately 300,000 barrels per day over the past week – 16 percent of California’s total output. Chevron’s Richmond refinery in northern California also reported an unplanned flaring activity at one of its main processing units in recent days, shelving a portion of its 240,000 barrel per day throughput capacity.
PADD 5 Productivity and Price Impacts
For context, the productivity of PADD 5 refineries – including California – has started the second quarter of 2019 noticeably below historic norms, with April figures dipping below 80 percent for the first time since 2017 (chart below). This was well below the metric’s five-year average and drastically lower than levels experienced in 2018, acting as a direct influencer of heightened diesel prices throughout April and through May to date. Consequently, PADD 5 distillate fuel inventories – such as diesel – fell to 13.2 million barrels, about 562,000 barrels below the five-year average.
While the said disruptions are not expected to persist long-term – with the Benecia refinery gradually resuming operations mid-May and the Chevron event classified as non-severe – the recent supply shock exposes the diesel price risk of potential events throughout the energy supply chain. Barring any additional refinery disruptions on the west coast or any extended outages as a result of recent events, California and neighboring refiners will likely boost production to account for demand of summer driving season. This natural uptick in output will help counter the recent rise in diesel prices, though the exact timeline for local prices reverting to more normal levels remains uncertain.
Breakthrough Fuel Recovery accounts for all diesel price volatility for clients reimbursing carriers for fuel. To learn more about the recent developments in the LA/West Coast spot market, or to gain insight into other price drivers for shippers moving goods to market, contact us.