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24.02.2006
Tweaks to gasoline complicate futures trading
SAN FRANCISCO (AFX) -- Some environmentally-friendly tweaks to gasoline sold at the pump this year may make trading on the New York Mercantile Exchange even trickier than usual.
And the usual switch from the winter blend of gasoline to the specifications required for the hot summer months won't help any.
'Throughout the last decade, we've seen February fire sales on gasoline that represented the 'perishable' winter blends that had limited shelf life,' said Tom Kloza, chief oil analyst at the Oil Price Information Service.
This year, all of the RFG (reformulated gasoline) contracts can be perceived to have limited shelf life, he said.
'The gasoline that is being traded now is akin to bananas that will go brown.'
In May , the market must adhere to new requirements for cleaner-burning gasoline and completely phase out chemical compound MTBE, also known as methyl tertiary-butyl ether , according to Phil Flynn, a senior analyst at Alaron Trading in Chicago .
As a result of the MTBE phase out, the NYMEX unleaded-gasoline contract is 'becoming less popular by the minute and open interest seems to be going away because you're basically trading a lame-duck contract ,' said Flynn. 'Nobody wants the gasoline contract with MTBE in it.'
MTBE has been used in U.S. gasoline since 1979 as an octane booster, and helps fulfill oxygenate requirements set by the 1990 Clean Air Act Amendments, according to the Environmental Protection Agency. But MTBE has found its way into ground water, threatening the environment.
Ethanol boost
In place of MTBE, ethanol is the most likely alternative oxygenate for reformulated gasoline and demand for it promises to grow significantly going forward.
'The last time this happened was in the spring of 2004 when a number of areas in New England switched to an ethanol blend,' said James Williams, an economist at WTRG Economics.
'The uncertainty associated with the ability of refiners to meet demand -- more than any actual shortage of supply -- pushed refining margins on gasoline to historic highs,' he said, and 'there could be a repeat of that.'
The problems with switching to ethanol from MTBE are manifold , he said.
Refineries must be modified to produce the correct blending components and terminals must add separate storage for ethanol since ethanol must be transported and stored separately from gasoline and only blended just before delivery, he said.
So, in many cases, terminals may also need blending equipment. Then there's required permitting, space and capital expenditures, Williams said.
'Ethanol production capacity is not sufficient to supply the additional demand and will have to be supplemented with imports,' he said. And domestic ethanol will have to be shipped by rail to the East Coast, putting a strain on the rail system.
'With all the things that can possibly go wrong, it is likely that gasoline margins will increase despite the current high levels of inventories ,' he said.
Killing a futures contract
The complete phase-out of MTBE in gasoline will also lead to the conclusion of trading for a more than two-decade old futures contract.
The New York exchange plans to terminate the New York Harbor gasoline futures contract at the end of the year , according to Anu Ahluwalia, a spokeswoman at NYMEX.
That contract has been trading since December of 1984, she said. An alternative contract was introduced in October of last year .
New York Harbor reformulated gasoline blendstock for oxygenate blending, or RBOB , features physical delivery in the New York Harbor area for blending with 10% denatured-fuel ethanol.
It's 'like your basic gasoline -- before you put in the additives,' explained Flynn.
The purpose of the RBOB futures contract is to 'replace' the unleaded-gasoline contract , he said, adding that they're 'trading side by side right now .'
The last New York Harbor gasoline futures contract month to be traded is January 2007 , said Ahluwalia, and delivery for that contract would be in late December of this year.
Both gasoline futures contracts currently trade on the trading floor and NYMEX expects the transition to the RBOB contract from the old gasoline contract to be 'smooth' with the 'same players in the ring,' she said.
'The market is going to dictate what happens. Right now we're offering both,' she said, adding that the market will decide what type of gasoline to use and when .
Lacking liquidity
So far, interest in the RBOB contract has been less than stellar.
Open interest for the unleaded-gasoline contract was 163,746 contracts on Wednesday, and 20,304 for the RBOB contract, according to NYMEX data.
It is 'growing,' with the largest month of interest presently being May 2006, said Ahluwalia.
The market just isn't seeing open interest switching over into it yet -- probably because people are confused, said Flynn.
'The 'non-perishable' May RBOB contract -- which has limited liquidity and is not the province of fund traders and other speculators' is trading at a premium over reformulated gasoline, said OPIS' Kloza. On Thursday, it closed at $1.7851 a gallon, while March unleaded gasoline closed at $1.5134.
'Some physical traders believe that this gap could widen with the preference of the trade on purchases of gasoline that doesn't have MTBE,' said Kloza.
The dilemma: 'there is not enough open interest, nor any appreciable intraday volume to find liquidity in the RBOB contract ,' he said, and 'some funds have charters that prohibit them from trading contracts unless they meet certain open interest and volume thresholds.'
Physical traders probably would have 'preferred an outright end to the RFG-MTBE contract, which would help hasten the move to the RBOB benchmark,' he said.
'Late February and even early March could represent a slice of the Dark Ages for those who bet on a horse of the wrong specification,' he warned.
Tainting the outlook
All the confusion has been 'leading to a lot of uncertainty in the market,' said Alaron's Flynn.
The value of the old gasoline contract is 'losing ground because it's less desirable for distributors and refiners,' he said, and the moves have been 'exaggerated.' 'I think it's disconnecting itself from the real world and is not as reflective of your basic supply and demand fundamentals,' he said.
Indeed 'the clumsy movement from one lame duck but liquid contract into a new -- and as yet still illiquid contract -- accounts for much of the recent weakness in gasoline , said Kloza.
The April unleaded gasoline contract trades at under $1.60 a gallon, down about 14% year to date. The March contract traded as low as $1.36 earlier this month.
But 'much of this year's refinery maintenance remains to be done, and this will surely draw down gasoline inventories between now and the start of the peak demand season for gasoline in June,' said Geoff Sundstrom, a spokesman for motorists group AAA.
Added to that, are the 'unique domestic blending issues,' and the need to keep a 'sharp eye on the weather, since some scientists believe we will have another active hurricane season in 2006,' he said.
The average price for a gallon of regular unleaded gasoline stood at $2.224 on Jan. 3 -- the highest price ever seen for the start of a new year, according to Sundstrom.
Prices were at $2.245 on Thursday, over 35 cents above the year-ago level and just over 81 cents below the record of $3.057 from Sept. 5, according to AAA's Daily Fuel Gauge Report.
Flynn bets that retail prices for gasoline will reach about $3 in the summer because of strong demand.
Kloza said the 'chances of a $4 a gallon gasoline require a geopolitical storm in Venezuela, Iran, etc. or a direct hit on U.S. refining by one of this summer's as-yet-to-be-named storms.'
Even so, 'making the case for a rise to $2.50-$3 a gallon gasoline is not very difficult,' he said.
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Reformulated gasoline (RFG ) before the oxygenates are added is often referred to as reformulated gasoline blendstock for oxygenate blending (RBOB ). It is the base fuel to which oxygenates are added to make RFG.
RFG must contain oxygenates and should result in a 15 percent reduction of volatile organic compounds (VOCs) and air toxins.
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February 13, 2006
Marketers Fret Over Chevron Ethanol Plans for Spring
Chevron will switch to ethanol blends in reformulated gasoline markets in Texas markets by May 1, at a switchover cost expected to be up to $2 million per terminal, Oil Express learns.
Reformulated blendstock (RBOB) should be available on the Explorer Pipeline by the third week of April, and Chevron will start out with a 5.7% ethanol blend, moving later to a 10% blend.
Since ethanol raises octane levels by about two octane points, the base gasoline will be about an 85 for regular no-lead, an 87 for mid-grade, and a 91 for premium. Chevron will ensure that the blend is a low-vapor pressure product and it will be up to jobbers to make sure their operations are prepared for ethanol use, company officials told marketers at a meeting last week.
Marketers say they’re not looking forward to the changeover, especially in light of warnings from Chevron about the potential for problems, such as water separation in station tanks.
“They’ve said they won’t take back any gasoline that has been contaminated as a result of water, and that means you just bought yourself a huge headache,” says one jobber. “You won’t be able to sell the product for transmix because of the ethanol, and it’s almost impossible to find someone with the equipment to separate it out. If you get water in it, you’re going to have to spend about $1/gal to get it pumped out and incinerated at an EPA-approved facility,” he says.
Chevron is also advising marketers to change their dispenser filters to a water-guard filter every week or so during the initial phase-in period, and to switch to a modified water gauging paste, since the one currently used at many stations won’t detect water in ethanol gasoline blends.
Under Texas law, marketers must list alcohol content on the pump, so decals will also have to be changed out – once with the switch to the 5.7% blend, and again when Chevron goes to a full 10% blend.
The addition of ethanol to gasoline will also result in a 2% to 3% drop in mileage, but Chevron offered no advice to marketers on how to handle potential consumer complaints on the issue.
Meanwhile, marketers are awaiting word of Shell’s plans after being notified that that company, too, will switch to ethanol blends in Houston and Dallas/Ft. Worth by May 1.
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February 6, 2006
Spot Players Eyeing Switch to RBOB Contract in H2 April
The heavily anticipated switch to the NYMEX RBOB blendstock contract as the critical reference point for the physical gasoline market in U.S. is likely to take place only in mid-to late-April, predict traders in N.Y. Harbor and Gulf Coast markets .
The prediction comes despite efforts by Platts to move its own assessment linkage for various grades to the first working day in April.
It's thought by most observers that the RBOB futures contract will eventually replace the RFG contract as soon as it gains more liquidity. The NYMEX RFG contract will persist at least to year's end, but physical and paper traders believe only one gasoline contract can survive over time.
The transition from RFG to RBOB on the NYMEX is expected to be slow and painful, partly because of the huge positions in the RFG contracts held by the funds, oil companies and locals.
Recently, trading in the NYMEX RBOB pit was gradually picking up, especially for the May futures contract.
May RBOB contract saw 475 lots traded on Wednesday, compared with a paltry 25 lots in mid-December.
"It is a tough call. We expect the transition to be a mess in April-May because the market would need to deal with the new RBOB contract and upcoming switch to ultra-low sulfur diesel in June ," a trader said.
Some traders do not expect the market to switch quickly to RBOB-linked cash deals overnight.
"A pricing agency will not dictate the market...The market will make that determination," a trader said.
Another trader in the Northeast said that a move to switch the basis contract to the NYMEX RBOB contract before May 1 could be perceived as a push to get oil refiners to change their pricing mechanisms.
"In theory, it might work, but it remains to be seen if it will actually work," he said.
Some suppliers sense that Platts may have second thoughts about implementing the change on Apr.3, mainly due to an onslaught of negative feedback.
Most traders are in favor of a change to RBOB-linked physical price assessments sometime in May when the volume begins to build.
So far, no physical gasoline deals in any U.S. domestic markets have been done with the RBOB contract as the reference base.
Once the new energy bill takes effect in the first week of May, it is suspected that few refiners and blenders will make MTBE-laden gasoline, and many distributors and retailers will be loathe to take delivery of the long used blend.
Geändert von Benjamin (24-02-2006 um 14:24 Uhr)
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