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Price Inversions: What Are They And Why Do They Happen?

Occasionally, unbranded wholesale fuel becomes more expensive than its branded counterpart. This rare occurrence is known as a price inversion, which can happen in certain circumstances. To understand what a price inversion is and how it affects the fuel market, one must have basic knowledge of how the normal wholesale fuel market works. The causes of a price inversion and what it means to retailers are important factors in managing fuel costs.

The normal wholesale fuel market

Gasoline from refineries is sold to fuel wholesalers, who own terminals around the country. Some of the fuel wholesalers sell primarily to branded retailers while others sell mostly to unbranded retailers. If a wholesaler who sells mainly to branded retailers has any excess, that extra gas is made available to unbranded operators at a discount.

On a normal day, the price of wholesale branded fuel is 5 to 10 cents more per gallon than wholesale unbranded. The extra cost of branded gas covers the cost of marketing the brand as well as the costs of additives added to the fuel. Unbranded fuel does not have the additives and does not need the big advertising budgets. Most non-branded retailers prefer to buy the unbranded gas due to the lower price.

What causes a price inversion?

A price inversion happens when supply and demand get out of balance. However, It takes a series of events to trigger such an inversion.

First, the supply of unbranded fuel must suffer a shortage. Shortage can happen when terminals, refineries, or pipelines that handle unbranded gas go down unexpectedly. This shutdown, in turn, causes a shortage of unbranded fuel. Retailers that want unbranded fuel have to turn to branded suppliers to make up for the shortage.

Branded suppliers can offer some gas to those who buy unbranded, but not at the expense of the branded supply. At some point, the branded suppliers will start restricting the amount of fuel supplied to buyers who want unbranded.

At this point, the supply of unbranded fuel is severely restricted. This restriction causes unbranded prices to start rising. The branded supply and price remain stable. Eventually, the price of unbranded will rise above the branded fuel, causing a price inversion.

What does a price inversion mean for fuel retailers?

When a price inversion happens, retailers see a dramatic price increase on unbranded gas, especially with no contract in place. This increase can happen in just a matter of days.

Retailers that handle unbranded gas usually have to take the hit to stay competitive with branded gas retailers. Unbranded gas retailers have to hope that people will buy other items, like snacks or drinks. At the same time, branded gas retailers are going to see a rise in business due to the lower cost of branded fuel.

How often do price inversions occur?

The good news is that price inversions rarely happen. Price inversions have happened twice in the past decade, once in 2006 and once in 2011.In 2006, events overseas combined with the effects of Hurricane Katrina to create a supply and demand imbalance resulting in a price inversion.

In 2011, a major producer in the unbranded fuel market had one of its main refineries go down unexpectedly. Simultaneously, the same producer had planned downtime at a second refinery. Another producer in the unbranded market was in the midst of transition to another kind of crude oil. These events caused the unexpected shortage of unbranded fuel.

Suppliers in surrounding states had only limited product available, causing the unbranded price of gas to start climbing quickly. Then the retailers experienced a price inversion. The situation lasted until the refining capacity started to recover and supplies loosened up.

Fuel retailers need to understand what can happen when supply and demand gets out of balance. If you want to learn more about price inversions and the impact they can have, give us a call, (806) 250-3991. The Kendrick Oil Company is happy to answer any questions you might have about our products or services. You can also reach us via email by clicking on Contact Us.