Blending economics for converting US summer grade gasoline to meet winter grade specifications are faltering from levels seen in June and July, but promised run cuts by refiners could see opportunistic blenders sopping up the summer grade overhang anyway, market sources said Tuesday.
Earlier this summer, falling differentials for summer grade gasoline had refiners and blenders increasing the amount of butane in the blend, but the rising price of butane has cut back on profits.
Summer grade gasoline is more expensive to make because environmental mandates require it needs higher levels of alkylates and reformates to keep it from evaporating into the air. Winter grade uses more butane, which is generally cheaper. The transition between grades happens in September.
"There were better economics to blend a month ago. It's marginal now to blend at these levels, but it can be done," said a gasoline blending source, about the rising price of butane.
Butane prices have been surprisingly strong this summer compared with last year, NGL traders have noted, a fact supported by higher prices.
The price of butane at major NGL trading hub of Mont Belvieu, Texas, Texas, averaged 62.3 cents/gal in July, or 58% of the price of NYMEX crude and 45% of the price of NYMEX RBOB. Last year, it averaged 54.8 cents/gal, 45% of crude and 29% of RBOB, Platts assessments showed.
But given the overhang of summer gasoline, some blenders say they can make it work, even with the rising price of butane.
"You still blend with butane, carry it and make some money," said another blender.
Besides run cuts for planned work, which are expected in the range of 700,000-1 million b/d along the US Gulf Coast in the third and fourth quarters, many refiners on recent second quarter result calls have cut back on rates for economic reasons.
PBF CEO Tom Nimbley reported a 6% rate cut across his five refineries to stop a decline in profit margins.
And it would appear that this, in combination with planned and unplanned work at other US refineries, has had its intended effect. US Atlantic Coast cracking margins rebounded last week by more than $1/b for imported grades like Nigerian Bonny Light and Saudi Arab Light, according to Platts data and Turner, Mason & Co. yield formulas.
Arab Light margins closed $7.45/b Friday, their strongest since June 24, Platts data shows.
Blenders said run cuts were seen as inevitable, and that refiners had anticipated them. This, according to one source, was evidenced by refiners heard selling RBOB crack spreads.
"Why would you not plan accordingly, and relinquish the margin to your competitor?" said one blender. "Lock in what margins you can on futures and basis."
The crack against WTI began June at nearly $20/b, but ended that month about $5/b lower, and then spent July in the $12-$14/b range. The steady declines likely prompted some buying interest, which helped lift the RBOB crack up to $16/b at the end of last week. However, the crack has retreated lower this week, and was trading Tuesday afternoon at $13.56/b.
US gasoline inventories are coming down from the record 258.7 million barrels seen in February to just over 238 million barrels for the week ended July 29, Energy Information Administration data showed.
At that time, a stronger than usual seasonal contango had refiners in maximum gasoline mode. The front-month NYMEX RBOB contract averaged a 22-27 cent/gal discount to the second-month contract through February.
Still, inventories need to come down more, a blender said ahead of Wednesday's EIA data.
Analysts surveyed Monday by Platts expect gasoline stocks to have fallen 1.6 million barrels last week, which would slightly exceed the 1.4 million barrel decline seen, on average, over the last five-years of EIA data.
