| NEW YORK, April 3
NEW YORK, April 3 The U.S. 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.
Traders said the additional production of winter grade came
because the price of butane BUT-USG, 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.
U.S. gasoline futures crack spreads RBc1-CLc1, 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
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.
"Certainly last 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."
Typically 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
The U.S. 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 retailers.
The market structure is also supportive of blending winter
grade, as gasoline futures are in backwardation, when
prompt prices are higher than deferred prices, discouraging
making and storing summer barrels.
The front-month contract's premium to the second month
RBc1-RBc2 rose to as much as 0.77 cents per gallon on Monday,
flipping from a discount just last week.
U.S. gasoline prices are about 16 percent higher than
a year ago and are inching closer to a seasonal two-year high as
inventories have begun drawing consistently.
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
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)."
(Reporting by Devika Krishna Kumar in New York; Editing by