The Fuel, and Vehicle Trends Report

ISSN 1948-2388

The Fuel and Vehicle Trends Report February 6, 2019

This report is a summary of the latest fuel prices and other oil industry key statistics. In addition, this report provides the latest trends in vehicle registrations and transportation tax collections for the state of Washington. It also summarizes articles appearing in popular, business, and technical media referring to fuel price, production and supplies as well as vehicle sales and registration trends. At the end of the report is a listing of all articles summarized, with hyperlinks to internet sources where available. Some hyperlinks may require free registration or paid subscriptions to access. The appearance of articles, products, opinions, and links in this summary does not constitute an endorsement by the Washington State Department of Transportation. Photos and other artwork included in the report are either included with permission or are in the public domain. The Fuel and Vehicle Trends Report (ISSN 1948-2388) is compiled by Scott,Smith, Lizbeth Martin-Mahar, Ph. D., and David Ding, Ph. D., Economic Analysis Section, Budget and Financial Analysis Office of the Washington State Department of Transportation. Contact the editors by email at smithsc@wsdot. martinli@wsdot. or DingDav@wsdot. by telephone at (360) 705-7(360) 705-7942 or (360) 705-7502.

TABLE OF CONTENTS

FUEL PRICE TRENDS: CRUDE, GASOLINE AND DIESEL MARKETS................................................1 WASHINGTON RETAIL GAS AND DIESEL PRICES.........................................................................10 BIODIESEL FUTURES AND PRICE TRENDS..................................................................................12 FUEL PRICE TRENDS COMPARED TO FORECAST.........................................................................16 MOTOR VEHICLE FUEL TAX COLLECTION TRENDS COMPARED TO FORECAST ........................17 VEHICLE TRENDS ...................................................................................................................18 SUBSCRIBING TO THE FUEL AND VEHICLE TRENDS REPORT........................................................22 ARTICLES REFERENCED..........................................................................................................22

FUEL PRICE TRENDS: Crude, Gasoline and Diesel Markets Analysis by Scott Smith

National Prices

West Texas Intermediate (WTI) spot crude prices averaged $50.99 per barrel in January 2019. This is a $12.7 lower than the January 2018 average price of $63.70.

Figure 1: Weekly Cushing, Oklahoma WTI Spot Price: January 1990 to January 2019 $160

$140

$120

$100

$80

$60

$40

$19. $20

$0

$30.

Source: Energy Information Administration

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Dollars per Barrel

The Fuel and Vehicle Trends Report ISSN 1948-2388 February 6, 2019 The monthly average January 2019 WTI price is slightly higher than the low December

crude oil average of $49 per barrel. Both December and January prices are significantly lower than the average crude price in November of $58 per barrel. Brent spot oil prices stalled from late November until the middle of December at near $60 per barrel, sinking to $51 in late December, before rallying back to the near $60 in January. December was the weakest month of 2018 for Brent at $56.78 per barrel down $7.97 from the November average price. Figure 2: WTI - Brent Crude Oil Spot Price Spreads January 2008 to January 2019

Source: Energy Information Administration

Figure 2 shows prices and spreads between WTI and the world benchmark, Brent, which is produced in the North Sea. Note that the spread has very little to do with the general level of oil prices. The spread is better thought of as a basin differential for WTI dependent on local conditions. The spread between WTI and Brent in 2018 averaged about $6.80 per barrel, and due to logistical constraints, the spread at times hit more than $10 per barrel. There is simply not enough pipeline capacity to carry oil from the Permian Basin. As a consequence, the US is shipping more oil via rail. An average of 718,000 barrels of crude a day was shipped by railways nationwide in the US, which represents an 88% increase from a year earlier, based on EIA data as of October 2018. This 2018

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The Fuel and Vehicle Trends Report ISSN 1948-2388 February 6, 2019

rail shipment level is still less than a peak average of about 1.1 million barrels shipped in October 2014.

This 2018 average difference for WTI-Brent should decrease in 2019 due to the fact that there will be additional pipeline capacity from the Permian Basin ramps up in the later part of the year. The Energy Information Administration (EIA) forecasts Brent prices will average $61 in 2019 and $65 in 2020. IHS Global Insight's January 2019 forecast projects a WTI crude oil price of $55 per barrel in 2019 and $63 per barrel in 2020. As of January 2019, Consensus Economics projects WTI prices at an average of $59 per barrel in 2019 and $60.8 per barrel in 2020. EIA's forecasts a Brent-WTI price spread of $6.33 per barrel and $4 per barrel for 2019 and 2020, respectively.

World and US Oil Production

EIA reports U.S. crude oil production averaged 10.93 million barrels per day in 2018. EIA forecasts 12.07 million barrels per day in calendar year 2019 and even higher in 2020 averaging 12.86 million barrels per day. As Figure 3 shows, the vast majority of the production increase originated from the lower 48 excluding the Gulf of Mexico. Production in the lower 48 states grew by 29.5 percent from 6.74 million barrels per day in 2016 to 8.73 million barrels per day in 2018. This trend is expected to continue in a more muted fashion through 2020. The largest amount of U.S production by far comes from the Permian Bain in West Texas and Eastern New Mexico. The Permian basin produced roughly 3 million barrels per day in 2018 and if the Permian basin were an OPEC country, it would rank number 4th behind Saudi Arabia, Iran, and Iraq. This increase in US crude oil production has a damping effect on US crude oil prices.

Figure 3: U.S Crude Oil Production By Source of Crude 2017-2020 (million barrels per day)

Source of US production

2016

2017

Alaska

0.49

0.49

Federal Gulf of Mexico

1.60

1.68

Lower 48 States (excl GOM)

6.74

7.18

Total U.S. production

8.83

9.35

Source: Short-term Energy Outlook, January 2019

2018 0.48 1.73 8.73 10.93

2019 0.49 1.90 9.68 12.07

2020 0.49 2.19 10.18 12.86

Congress only allowed the export of U.S. crude in 2016, and this has linked WTI to the world market. For the first time in modern history, the U.S. exported more crude and refined products than it imported, hitting this milestone in the week ended Nov. 30, 2018. Blas with the American Petroleum Institute reported that the US has been heading in this direction of becoming a net exporter for years but this last week in November's dramatic shift came as data showed a sharp drop in imports and a jump in exports. The US should remain a small net importer most of the time. According to broader definitions of net imports of crude oil and other liquid fuels from EIA, they anticipate the US being a net importer of all petroleum products by September 2020 and this trend continuing to grow in the future. With the US having more exports of petroleum products show

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The Fuel and Vehicle Trends Report ISSN 1948-2388 February 6, 2019 expand our demand for our refined commodities and put upward pressure on WTI prices and gasoline and diesel prices in the future. Figure 4: U.S Net Imports Since January 2013 With January 2019 EIA Forecasts

Inventories Our Trends Report uses historical five-year averages for inventories to compare to current

inventory levels. Weekly inventories for crude oil, gasoline, and distillate span five years from 2013 to the January 2019. Inventories are often used as a measure of over/ undersupply and includes all of the U.S. crude oil and lease condensate (mixture of heavy hydrocarbons and pentanes) currently held at refineries, within pipelines, and at pipeline terminals. Weekly inventories in 2018 were markedly lower than there 2017 counterparts; the trend was reversed only in late November. As of the end of January 2019, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 0.9 million barrels from the previous week. At 445.9 million barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. These higher crude oil stocks are having a damping effect on crude oil prices and the future outlook for WTI. Many industry watchers have begun to question the accuracy of these crude oil inventory figures. The Oil Price Information Service (OPIS) notes:

"The perception as 2019 begins is that oil is oversupplied, but there is disagreement as to what represents a reasonably neutral inventory number. The addition of thousands of miles of pipelines, tanks, strategic storage and other infrastructure renders 20th-century inventory tabulations archaic."

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Million Barrels

The Fuel and Vehicle Trends Report ISSN 1948-2388 February 6, 2019

Figure 5: 2018 Weekly U.S. Ending Inventories of Crude Oil (Excluding Strategic Petroleum Reserve)

550

500

450

400

350

300

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Weekly U.S. Ending Stocks Excluding Strategic Oil Reserve of Crude Oil

5 year average 2013-2017 2018 inventories 2017 inventories 5 year range 2013-2017

Source: Energy Information Administration

The West Coast Oil Market

The Energy Information Administration organizes the country into five Petroleum Administration for Defense Districts (PADDS) and Washington is located within PADD 5. PADD 5 spans the Pacific and most importantly includes Oregon and California. Currently, West Coast (or PADD5) refineries process about 3 million barrels/day. California refineries account for around 2 million of capacity or roughly two-thirds of capacity; the "lower 48" remainder is in Washington. There are no refineries in Oregon and Arizona. Arizona is also connected to Permian basin supplied refineries and responds differently to economic conditions. Northern California is a gasoline exporter. Southern California is a huge gasoline importer and draws on international shipments to meet demand. California refineries are principally supplied by internal production and oil from Alaska's North Slope. Analysts have often pointed out that the PADD 5 market is very different from the rest of the United States because it is only partially connected to the major sources of U.S. oil production and gulf coast refineries. Figure 6 shows gasoline inventories for the west coast, PADD5. 2018 year-end inventories were well below 2017 levels and the five year averages. Inventories were actually below the bottom of the five year range through most of the fall and end of the year. In November, gasoline inventories spiked up again to be in the lower portion of the 5 year average range. Then in December, the inventories fell again until the following month when

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Million Barrels

The Fuel and Vehicle Trends Report ISSN 1948-2388 February 6, 2019 there was another increase in gasoline inventories in January. This increase in January 2019 gasoline inventories is consistent with the sizable drop in Washington average monthly gasoline price during that month. Figure 6: 2018 Weekly Ending Gasoline Inventories (West Coast PADD5)

38

36

34

32

30

28

26

24 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Weekly West Coast (PADD 5) Ending Stocks of Total Gasoline

5 year average 2013-2017 2018 inventories 2017 inventories 5 year range 2013-2017

Figure 7 shows west coast (PADD 5) distillate inventories. Since few west coast structures use home heating oil, the vast majority of this production consists of diesel used as transportation fuels. Calendar Year 2018 started the year with higher distillate inventories, at the top part of the 5 year average. As the year continued, distillate inventories dropped but then by April, the inventories spiked up again and then they started to slowly fall again and that decline continued through the remainder of the year. By the end of 2018, distillate inventories fell back to tracking historical patterns but for the most part they tracked the lower portion of the 5 year range of inventories.

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The Fuel and Vehicle Trends Report ISSN 1948-2388 February 6, 2019

Figure 7: 2018 Weekly Ending Distillate Inventories (West Coast PADD5)

17

16

15

Million Barrels

14

13

12

11 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Weekly West Coast (PADD 5) Ending Stocks of Distillate Fuel Oil

Source: Energy Information Administration

The Washington Oil Market

5 year average 2013-2017 2018 inventories 2017 inventories 5 year range 2013-2017

This next section of the Trends Report is provided to give some background on the delivery and transportation of oil and petroleum products throughout the state. Washington actually has two separate markets for oil and downstream fuels. One market is the eastern part of the state which has no refining capacity. It is principally supplied by a pipeline that runs to Salt Lake City, Utah and responds to the economic conditions found in PADD 4 Utah refineries receive crude oil from Alberta, Canada and the sedimentary basins in western Colorado and eastern Utah. Oil is also brought in by pipeline from refineries in Billings, Montana which is supplied by Alberta, Canada oilfields.

The second market is the western portion of Washington. All five Washington refineries are in the in the Puget Sound region and have a combined capacity of 634 Mb/d. BP, Shell, Tesoro, Phillips 66, and U.S. Oil own these refineries in Washington. The two largest refineries, belonging to majors BP and Shell, each have coking capacity to process heavy crudes. The rest of the refineries mainly process light or medium crude. These five refineries supply the western part of Washington with all its refined petroleum products.

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The Fuel and Vehicle Trends Report ISSN 1948-2388 February 6, 2019 Figure 8 shows the oil transportation and production grid for the state. Figure 8: Washington Oil & Petroleum Production and Transportation Grid

Source: WA Department of Ecology

Washington refineries are supplied by sea, pipeline, and rail. The shipments by sea carry Alaska North Slope from Valdez. There is only one crude oil pipeline supplying Washington; it originates in Alberta, Canada .The remainder is shipped by rail and mostly originates in the Bakken Field in North Dakota. According to the January 2019 quarterly edition of the Crude Oil Movement report, the Washington Department of Ecology states that there is very little crude oil transshipment in the Washington market.

Figure 9 shows the movement of crude oil in the state in 2018. The oil traveling by vessel is mostly light sweet crude from Alaska and abroad. Likewise, Washington State Department of Ecology shows in their quarterly report that rail shipments are light, sweet crude from the Bakken fields in North Dakota. The pipeline contains sour heavy crude from Alberta. The Alaska North Slope Oil comes to Washington via vessel and the current production is around 900 barrels/day and is declining. Faced with the threat of dwindling mainstay crude supplies from Alaska, refiners in Washington State have replaced Alaska North Slope crude with North Dakota Bakken crude moved in by rail as reported in RBN LLC blog.

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