MOSCOW (MRC) -- The US East Coast
gasoline market looks set to begin the summer driving season with fewer barrels
in storage than last year, as refiners have been profiting by producing winter
grade gasoline longer than usual, trading sources said, said Reuters.
said the additional production of winter grade came because the price of butane,
a key blending component for winter gasoline, has nearly halved in two months.
That spurred traders and refiners to make more of the higher-volatility fuel
that cannot be used in the summer.
US gasoline futures crack spreads, an
indication of refining profits, remain at seven-year seasonal lows as
inventories hover above the five-year average. Making the cheaper grade of fuel
is one way to offset that.
However, there is a limited two-month window
to make the trade work, so those who can get the blending components at the
right prices will continue to blend winter grade, particularly as favorable
economics to store the barrels fade, traders said.
Summer gasoline is
harder and more expensive to produce than winter grade, which is why pump prices
tend to rise with the heat. In 2016, a glut of inventory hammered refiners'
margins and they started blending winter grade gasoline earlier than
In the winter, when evaporation is less of a concern, gasoline is
made with a higher Reid Vapor Pressure (RVP), a common measure of the volatility
of gasoline, by blending butane into it.
Butane prices typically tend to
fall in late February and March when blending demand tapers but this year rose
to a two-year high early in February before dropping.
year for local refiners the economics were there to make summer grade early and
that created an artificial surplus because summer grade gasoline was going into
tanks before there was any consumption," said one East Coast trader who
currently has sales lined up for the winter blend. "This year, there will
certainly be less (summer grade) to start the summer season."
the switch to summer grade starts between late-March and mid-April as refiners
come out of maintenance but if demand persists, they are expected to make the
winter fuel for longer.
The US Environmental Protection Agency (EPA)
mandates that summer-grade gasoline and reformulated gasoline be used in certain
regions staring May 1 for refiners and terminals, and June 1 for gasoline
The market structure is also supportive of blending winter
grade, as gasoline futures are in backwardaton, when prompt prices are higher
than deferred prices, discouraging making and storing summer barrels. The
front-month contract's premium to the second month rose to as much as 0.77 cents
per gallon on Monday, flipping from a discount just last week.
gasoline prices are about 16% higher than a year ago and are inching closer to a
seasonal two-year high as inventories have begun drawing
Gasoline inventories in the East Coast region fell to 65.6
million barrels as of March 24, their lowest since late December, but are still
at the highest seasonal level in at least seven years, according to the Energy
Information Administration (EIA).
The EIA does not provide a break up of
summer and winter blends in storage but traders believe most of the barrels are
winter grade and will draw down over the next few weeks.
The East Coast accounts for nearly a third of the country's total gasoline
demand and includes New York Harbor, delivery point for the New York Mercantile
Exchange contract. However, the move to keep producing winter barrels could
backfire if demand peters out and refiners could get stuck with gasoline that
then would not be legal for sale until September.
"There's a pretty
limited window to do this ... it will be opportunistic," said Robert Campbell,
head of oil products markets at consultancy Energy Aspects. "It does make summer
look a little better (for refiners)."