This spring, refinery crack spreads for gasoline and diesel in California fell below average levels, even though refinery capacity on the West Coast (PADD 5) has decreased. Crack spreads, which measure the difference between refined product prices and an equivalent volume of crude oil, are used to estimate refinery margins based on commodity market conditions. The decline in West Coast crack spreads is attributed to rising regional gasoline inventories and the increasing use of biofuels instead of conventional petroleum-based diesel fuels in California.
In early May 2024, gasoline crack spreads in the Los Angeles region fell below the previous five-year (2019–23) average for this time of year. Los Angeles is a major pricing center for California, the largest market on the West Coast. Most refining capacity on the West Coast is located in California, making market conditions in the state significantly impactful on the broader region.
Despite long-term reductions in West Coast refining capacity, regional gasoline crack spreads have declined since the end of April. This decline occurred as refinery production increased following a period of seasonal maintenance, and as motor gasoline consumption decreased, leading to higher inventories. According to the Weekly Petroleum Status Report, West Coast gasoline inventories have generally increased on a weekly basis since the end of April. In the first quarter of 2024, West Coast motor gasoline consumption decreased by 2% year over year. This lower gasoline consumption may reflect increased fleet efficiency driven by the uptake of lower emission vehicles. Additionally, shipments of crude oil from western Canada via the Trans-Mountain expansion may be reducing crude oil acquisition costs for some West Coast refiners, boosting production despite lower crack spreads.
West Coast inventories of distillate fuel oil, usually consumed as petroleum diesel, remain below the five-year low. Low distillate inventories have supported diesel prices, keeping them closer to the five-year average compared to gasoline. However, the impact of low distillate fuel oil inventories on diesel prices is muted due to growing renewable diesel inventories. The West Coast is the largest destination in the country for renewable diesel, which supplements petroleum diesel but is not currently reflected in weekly distillate inventory data.
SEE ALSO: What Does Eia Stand For？
The drop in West Coast crack spreads reverses recent trends. Since 2022, crack spreads on the West Coast have generally been higher than the five-year average, reflecting both higher global prices and reduced production. Local production is crucial on the West Coast because of limited infrastructure to carry additional petroleum products from other U.S. refining centers, such as the Gulf Coast.
Annual average flows of refined petroleum products to the West Coast from other parts of the United States have grown by 40% since 2010. In 2023, annual interregional movements to the West Coast reached a record 482,000 barrels per day (b/d), with the Gulf Coast and Midwest accounting for a combined 80% of all transfers into the West Coast. This increase in transfers reflects the shrinking refinery capacity on the West Coast. The West Coast lost 285,000 b/d of refinery capacity following the closure of Marathon’s Martinez 161,000-b/d refinery in 2020 and the gradual decommissioning of capacity at Phillips 66’s Rodeo refinery, which ended petroleum refining operations in February this year. Consequently, the West Coast now has 10% less refinery capacity than it had in 2019.