February 10, 2011
Gasoline dealers in the east of the Rockies markets have seen higher wholesale rack gasoline prices despite a drop in NYMEX RBOB and WTI paper values in the first six weeks of this year.
Some dealers in the Northeast were hoping to see a similar price drop at the racks in response to the weaker crude and RBOB prices on NYMEX. However, suppliers had to explain that Northeast and Gulf Coast prices were boosted by Brent’s continuous strong price premium over WTI crude and robust LLS domestic crude premium, and Mid-Con was supported by a slew of refinery issues due to cold weather.
Since Jan. 3, WTI crude prices fell $4.23 to $87.32/bbl, and RBOB dropped 5.43cts to $2.4985/gal. During the same time period, Northeast conventional regular gasoline flat cash price rose 2.14cts to $2.4662/gal, and Mid-Con conventional regular jumped 7.49cts to $2.4772/gal, according to OPIS historical price data.
Gulf Coast conventional regular skyrocketed by 10.13cts to $2.4861/gal. As a result of the strong cash prices, gasoline crack spreads rose from $10/bbl to about $18/bbl, based on RBOB-WTI crack spreads. It is noted that this strong gasoline margin is seen mostly only in the Midwest due to accessibility to relatively cheaper WTI and Canadian crude supplies.
Gasoline margin for many refiners on the Gulf Coast and Northeast remains squeezed due to reliance on foreign crude grades, which are priced off the comparatively stronger Northeast Brent crude.
In the Midwest market, gasoline cash prices are supported by refinery operational issues and low inventory at the Magellan storage terminal. Recent cold weather and blizzards cause Midwest refineries to run at significantly lower rates. Western Refining has shut its El Paso refinery in West Texas, and Holly’s Artesia and ConocoPhillips’ Borger and Valero’s McKee continue to run at low rates. These refineries are expected to return to normal rates shortly, possibly over the next week.
Midwest refineries will aim to ramp up operational rates in the coming weeks to rebuild inventory and take advantage of the strong crack spreads. Products prices are expected to reflect that bearish move.
In the Northeast, cash products prices are stronger on the back of higher Gulf Coast values and a closed arbitrage window for incremental European imports. Also, both Northeast and Gulf Coast refineries rely on more expensive foreign crudes compared with WTI.
The recent price rise was a reflection of the products markets catching up with the hefty Brent price premium over WTI. Some traders also said that the NYMEX RBOB, closely linked to the Northeast cash gasoline market, could be oversold in the past few sessions.
In the Gulf Coast, besides expensive foreign imports, refiners also faced a strong $15/bbl LLS crude price premium over WTI. The disconnected products markets in east of the Rockies could be the new norm
Wide Winter RBOB Contango May Offer Clues to Summer Outlook
The transitional price spread for winter to summer RBOB gasoline on NYMEX is expected to widen in response to a projected snow storm sweeping across the Midwest and Northeast and continuously strong refining margins, traders told OPIS on Tuesday.
The current March-April RBOB paper spread of about minus 14cts/gal is considered significantly wider than normal, and the sharp contango price curve should encourage gasoline players to store summer blending components now ahead of the peak driving season. The wide gap could also point to a possibly bearish summer gasoline outlook.
The March-April RBOB spread is expected to widen further by a few more pennies to 16-17cts/gal in the near term, based on the lackluster demand, strong cracks spreads and high refining rates.
The “typical” contango spread between winter and summer RBOB was about 10- 12cts/gal in the past few winters and about 9cts/gal two weeks ago.
The sharp contango price curve represents a very weak winter gasoline demand and higher production. The seasonally weak gasoline demand in winter is depressed further by repeated snowstorms in the Northeast since last Christmas.
This week, a massive snowstorm is expected to sweep through the Midwest and Northeast, affecting an estimated one third of the U.S. population.
“Gasoline demand has struggled mightily so far in January, notably due to storms,” a marketer in the Northeast said, adding that January gasoline demand is about 8%-10% lower. “There is also the customer’s psyche related to $3/gal price at the pumps,”
On the supply front, U.S. refineries continue to crank up operating rates, taking advantage of strong distillates cracks and robust export demand. As a result, higher production adds to the growing inventory amid a storm-hit demand.
READY FOR SUMMER
Looking ahead, a weak winter gasoline market may not necessarily translate to a weak summer gasoline outlook, but some traders pointed out that a sharp price contango curve would encourage players to store summer gasoline components.
With more summer gasoline components available for blending prior to the peak demand season, the spot market could see an abundant supply of summer gasoline in April.
It is possible to blend winter RBOB into lower-RVP summer grade if the right blending components are used. Besides striking a balance between supply and demand, market players would also need to look at imports and exports of gasoline and blending components in the U.S. as well as refining rates in the U.S. and Europe.
Adding to the potentially bearish outlook for Northeast gasoline market in summer is the expected restart of Delaware City refinery in the second quarter.
PBF Holding Company LLC (PBF) is on track to restart its 190,000-b/d Delaware City refinery on May 1 after shutting it in late 2009 due to poor refining margins.
The higher domestic production is expected to displace gasoline imports from Europe if demand does not pick up in a meaningful way.
Regular imports from India are expected to remain more competitive than European origins due to comparatively better refining margins at Reliance’s newer and more efficient refineries at Jamnagar.