California gasoline and diesel markets are facing the potential for amplified future volatility as the state faces production cuts due to the impending closure of two refineries.
This vulnerability was highlighted in early October when Chevron experienced extended flaring at its 269,000 b/d El Segundo, California refinery, after containing a fire on 2 October, according to the South Coast flare event notification system. The initial event led to a surge in both gasoline and distillate markets in California and differentials were maintaining multiweek highs earlier in the week.
Since news of the fire broke, Los Angeles regular CARBOB gasoline prices rose 5¢/USG in the ensuing session and extended gains through 6 October to $2.48/USG — marking a total uptick of 8.56¢/USG. Diesel markets in southern California experienced even greater volatility over the period as prompt barrels spiked 15.58¢/USG and peaked at $2.43/USG on 6 October followed by a 7¢/USG drop the following day.
U.S. West Coast markets typically experience heightened volatility in September, associated with multiple refinery turnaround events in both California and the Pacific Northwest.
Refinery issues impacting regional markets is a near carbon copy of trends in prior years as a shrinking pool of summer grade gasoline availability is amplified by reduced refinery output due to units going offline for maintenance. October is the final month of summer grade 5.99 RVP gasoline production in California. End users and non-contractual buyers are often outbid by refiners — typically net sellers — entering the market to cover their own marketing and contractual needs when refineries are offline or producing limited output. November is considered a transitional period and is the only time of year where a 10.5 RVP CARBOB gasoline is produced, prior to December's 12.5 RVP Los Angeles winter grade and 14 RVP in San Francisco.
In 2022, Los Angeles regular CARBOB differentials that trade against the corresponding Nymex basis reached historic highs of +245.00¢/USG in the final week for September amid still-tight availabilities after the height of the Covid-19 pandemic, before stumbling down to -5.00¢/USG by mid-October. (https://direct.argusmedia.com/newsandanalysis/article/2377766).
Seasonal prices swings have previously drawn attention from government and oversight committees and California democratic governor Gavin Newson faces growing challenges by balancing the California’s leading environmental policies, while walking back other regulations that have targeted the oil and gas industry such as the recently extended cap and trade program (https://direct.argusmedia.com/newsandanalysis/article/2735373).
Chevron cited regulatory challenges in California as one of the main factors that precipitated the relocation of its corporate headquarters from San Ramon, California, to Houston, Texas, in 2024.
But California faces further trials due to the confirmed shuttering of two major producers. U.S. refiner Phillips 66 plans to shut its 139,000 b/d Los Angeles refinery by the end of 2025 and independent firm Valero aims to close or repurpose its 145,000 b/d Benicia, California, refinery by April 2026. The closures will result in California losing up to 17pc of its domestic fuel production.
Even if the state turns towards imports in an attempt to mitigate the loss in regional production, esoteric fuel standards unique to California would cause additional sourcing dilemmas as few refineries outside the state are capable of producing gasoline and diesel grades that meet the specifications set by the California Air Resources Board. Additionally, imported gasoline and diesel cargoes often require further “touching up” upon arrival to be on spec, adding further pressure on the shrinking infrastructure.
Craig Ross, Argus Mediacraig.ross@argusmedia.com
