Wait a minute! Maybe we’re still in Kansas after all. Or maybe we never left, and it was all just a silly nightmare.

It all started when crude hit $140/bbl earlier this year. Now it’s at $83/bbl. And what about those pump prices? In June, the national average was $2.08/L., today it’s 1.58/L. I guess those evil refiners must have got the message because their margins have fallen 17 cents per litre (cpl) from June’s 52 cpl to the August average of 35 cpl.

Now, with Labour Day and holiday driving trips over, gasoline demand will fall off and prices will follow suit. Right? Demand for diesel and heating oil will also drop because it’s still summer!

I guess when the U.S. and Canada said they would stop Russian supply of crude and refined products it really worked? And President Joe Biden was smart when he went to the bottomless well of crude sitting in the Strategic Petroleum Reserve (SPR). That must have sent a message to Russia and OPEC: Who needs you?

So, we’re out of the woods and heading to the field of dreams, just in time for the U.S. November midterms. That’s curious because that’s when the draining of the SPR will end. So will the political influence on lower pump and rack prices. This is because any draw from the SPR is fed to an interested oil refiner, and this draw is a loan, and this loan of crude must be replaced by the borrower. This means crude inventories will be drawn down from commercial, not government inventories, and prices will increase noticeably in December and through to early 2023.

Adding to this potential pricing problem is the fact that crude levels in the SPR are at the lowest levels since 1985, and the product that remains is not of the chemical profile suitable for processing by Gulf Coast refiners.

Things get even more complicated when we look at distillate (diesel and heating oil) inventories in the U.S. Northeast where 74% of all heating oil is consumed. Nationally, distillate inventories are bad enough being 23% below the 5 -year average, but in the Northeast, they are down 63%.

Some may say, “So what! It’s still summer. No big deal.” To those consumers I suggest they look at the rack or wholesale price of diesel versus gasoline.

As emphasized in previous reports at this time of year, in normal years, the spread may be one or two cpl. Today diesel is higher by 42 cpl.

Just wait and see what happens when we turn off the air conditioning and crank up the furnaces.

We may want to book the next flight out of Kansas.

– Roger McKnight – B.Sc., Senior Petroleum Analyst

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