By Brian L. Milne, Energy Editor, Schneider Electric
For the first time since the middle of December, the U.S. average price for regular grade gasoline moved lower according to the Energy Information Administration’s (EIA) weekly survey, pressured by worries over economic growth and the effect on fuel demand, along with lower asking prices by suppliers in moving out winter grade gasoline.
The EIA reported a 2.5 cents decline in the U.S. gasoline average for the week-ended March 4 to $3.759 gallon, ending 10 consecutive weeks in which the national average increased. From Dec. 17 through Feb. 25, the national average surged 53 cents or 16.3% to a $3.784 gallon five-month high.
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Don’t think a downtrend has started however, with wholesale costs again climbing, while gasoline’s futures contract posted a fresh 5-1/2 month high in beginning the second full week of March. And there’s a new wrinkle, the cost of compliance credits regarding the Renewable Fuel Standard has spiked, adding to gasoline wholesale prices that will be passed through to retail outlets.
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After pressured, in part, on slashed offers for gasoline to move out winter product, trade sources were talking of tight supply for summer grade gasoline near term, which bolstered cash prices. Additionally, some in the market said talk that the spring turnaround season ended early this year were misplaced, saying ongoing maintenance continues to limit output as US refineries.
The EIA shows the run rate for US refineries at 82.2% for the week-ended March 1, a nearly one-year low. Meanwhile, the domestic supply of gasoline has been drawn down for four consecutive weeks, now sitting at its lowest inventory level of 2013 while hugging the five-year average for the third straight week. It should be noted that the decline in gasoline supply is following its seasonal trend.
And almost suddenly, the cost for Renewable Identification Numbers, a government established credit used by obligated parties—oil refineries, blenders and importers—to show compliance in meeting the RFS spiked on concern over the “blend wall.”
The blend wall refers to near saturation of ethanol in the U.S. gasoline market based on a 10% concentration level, with E10 the maximum lawful fuel for all traditional vehicles. E15, a 15% ethanol concentration level in gasoline, did get a partial waiver from the Environmental Protection Agency (EPA) for certain newer vehicles and light trucks. However, most retail outlets have declined to add E15 to their islands on concern about product liability issues, while many automakers would void a warranty if a fuel with more than 10% ethanol is used. There are flex-fuel vehicles that can be fueled with a blend as high as 85% ethanol to 15% gasoline, but the E85 market has been slow to develop.
Amid declining gasoline demand compared with historical averages and an increasing RFS, with as much as 13.8 billion gallons of ethanol mandated for use this year, the oil industry has now said the blend wall has been hit. Trade groups for the oil industry such as the American Petroleum Institute have called the RFS “unworkable,” and are seeking repeal.
In the meantime, RINs have soared in value on worry that there would be a shortage of the compliance credits if not this year, then in 2014. An obligated party can carry over a maximum of 20% of unused RINs from the previous year to meet current obligations. In 2014, the RFS for renewable fuel, essentially satisfied with corn-based ethanol, increases by another 600,000 gallons from this year.
Consider the value of a RIN has spiked by more than a $1 in 2013, jumping from 7.0 cents to $1.15. That cost is now moving through the supply chain.
In futures trading, the New York Mercantile Exchange Reformulated Blendstock for Oxygenate Blending contract has spiked from a $2.28270 gallon low on Feb. 28, which coincided with the expiration of the March winter grade contract, to a $3.2672 gallon 5-1/2 month high on March 11. That’s a 44.0cts or 15.6% move in less than two weeks.
The contract has since reversed from the high on worries over slowing industrial expansion in China, the world’s second largest consumer of oil, and the knock-on effect it would have on oil demand. Yet, the risk remains on the upside for gasoline, especially if a drop in the U.S. unemployment rate in February to a better than four-year low at 7.7% signals an enduring recovery in the jobs market.
About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at email@example.com.