By Jason Parent, VP Consulting, Kent Group Ltd.
12 February 2015
Global crude prices have collapsed over the last seven months, and most crude benchmarks currently sit at less than half of their June 2014 value. This has translated to a sizeable windfall at the pumps for most Canadians – “most” because the size of that windfall has varied considerably depending on one’s vehicle’s fuel type. The average Canadian operating a vehicle fueled by gasoline has seen those retail prices drop nearly 50 cents per litre since their peak in June of last year, whereas those operating a diesel vehicle have realized a drop of only half that amount over the same time period. Why is that? And what factors are at play here?
Historically, disparities between retail gasoline and diesel price changes are a relatively normal phenomenon, driven by different seasonal demand patterns of two very distinct commodities. Gasoline demand (and subsequently its wholesale markup from the refinery to the dealer) peaks in the spring and summer; while diesel demand and associated refiner margins peak in the fall and winter due to its close relationship with heating fuel – essentially the same product other than their respective regulated limits on sulphur content.
Since 2008, Canadian diesel prices have averaged nearly 7 cents per litre more than gasoline during the period from November to February, while averaging nearly four cents per litre less than gasoline from May through August. Figure 1 shows the average monthly differential between diesel and gasoline prices in Canada since 2008.
Figure 1: Average Monthly Retail Price Differential (Diesel less Gasoline – cpl)
The seasonal disparity between the two products was much more pronounced in recent months, resulting in Canadian diesel prices that averaged roughly 20 cents per litre above gasoline in December and January. Gasoline margins were under significant downward pressure over this time, not only because of lower seasonal demand, but also because of the surge in production resulting from North American refineries running at very high utilization rates. Relatively inexpensive crude prices, and a refined product futures market that was in deep contango (a commodity trading term indicating higher futures prices compared to current spot prices) incentivized refiners to process more crude and store more refined product for future sale at expected higher prices.
This resulted in bulging gasoline inventories that sat well above their seasonal norms. While refineries also produced increasing amounts of diesel, there has been a much more robust export market for North American diesel products compared to gasoline. This kept diesel inventories relatively low compared to historical seasonal norms, and put additional upward pressure on wholesale diesel prices. The result: gasoline-related refining margins decreased roughly 5 cents per litre from June 2014 to January 2015, whereas diesel-related refining margins rose more than 14 cents over that same time.
This price disparity is expected to decrease in the coming months as winter turns to spring, and with it, the relative movement of gasoline versus diesel demand and associated refiner margins. The gap between average Canadian diesel and gasoline prices has already dropped from 21.1 cents per litre in the first week of January to just 12.5 cents per litre in the first week of February.
By Jason Parent, Vice President Consulting, Kent Group Ltd.
For further information, contact Jason Parent at 519-672-7000 ext 112.
Kent Group Ltd. is a London-based consultancy specializing in the petroleum refining and marketing industry. Kent Group Ltd. publishes the Weekly Pump Price Survey, Canada’s authoritative source of petroleum prices (available at no cost on our web site kentgroupltd.com). Our clients span a wide range of government, NGO and industry organizations with an interest in downstream petroleum issues. A full description of our consulting services is available on our web site.