Existing federal regulations, many of which mandate specific fuels and restrict refining capacity additions, make continued US gasoline price volatility very likely, a Mar. 15 report from Energy Policy Research Foundation Inc. (EPRINC) suggested.
Bottlenecks in distribution of crude oil to processing centers and, in some cases, constraints on the movement of transportation fuels also could contribute, said the report, written by EPRINC Senior Research Analyst Ben Montalbano.
“The recent volatility in gasoline prices in the Northeast is clearly driven by market forces, but the slow pace at which the market adjusted to the price run-up suggests more dislocations are on the horizon,” it noted.
The report said the differential between New York Harbor and Gulf Coast gasoline prices between last summer and February was wider than at any similar period in US history. Gasoline sold on the East Coast for 20-30¢/gal more than on the Gulf Coast at retail outlets, peaking at a 41¢/gal differential in November partially due to Hurricane Sandy, it said.
Although the spread currently is a more normal 5¢/gal, the upcoming summer driving season, a tenuous supply situation on the US East Coast and in Europe, and several regulatory hurdles that are emerging as serious barriers to US refined product supplies could widen it again, the report said.
After several northeastern refineries closed due to economics the past few years, the region was left vulnerable to unexpected supply outages despite expansion of the Colonial products pipeline from the Gulf Coast, which is due to be completed later this year, it indicated.
Jones Act impact
“Gulf Coast refiners have increased gasoline exports abroad as discounted crudes from the Bakken and Canada have enabled high crude throughput and healthy margins,” the report said, adding, “But the Jones Act has rendered the shipment of these supplies from the Gulf Coast to the East Coast prohibitively expensive.”
That removed the opportunity for the Gulf Coast to set the marginal New York Harbor price, leaving relatively expensive gasoline from Brent crude oil in Europe, a region that has lost 1.8 million b/d of refining capacity, as the US Northeast’s marginal supply and price setter, it said.
Remaining northeastern refiners have begun to ship Bakken crude from North Dakota by rail to save several dollars per barrel, even with transportation costs, over waterborne Brent-price crude from abroad, the report said. But mandates imposed under the federal Renewable Fuel Standard, which was part of the 2007 Energy Independence and Security Act, could quickly erase this improvement, it added.
The US gasoline market is in the first stages of its crash into the so-called blend wall as refiners and other obligated parties have been forced into “underblending” mode for 2013 and beyond, it said.
“RFS volumetric requirements for 2013 are greater than the volumes obligated parties can blend under the physical 10% blend wall,” the report said. “This necessitates the drawdown of carryover Renewable Identification Number [RIN] stockpiles to meet obligations in 2013 and 2014, given the absence of economically and logistically feasible alternatives to meeting RFS obligations.”
Panic RIN buying
“This has caused what could be considered ‘panic buying’ over the past few weeks,” it continued. “RIN prices skyrocketed from barely more than a nickel on Dec. 31 to over $1 on Mar. 7. Ongoing RIN price volatility does not bode well for gasoline market stability going into the summer, and should RIN costs remain at elevated levels, cost pass-throughs will soon be felt at the pump.”
The report said the US refining market has entered a phase in which the RFS discourages gasoline and diesel fuel supplies. Low-cost compliance options such as blending ethanol at less than 10%, banking of carryover RINs, and the purchase of RINs at less than 5¢/gal are nearly exhausted, and “obligated parties must now move up the compliance cost curve,” it said.
It noted that during her recent appearance at the Center for Strategic and International Studies, Heather Zichal, deputy assistant to US President Barack Obama for energy and climate change, raised the question of whether the US should revisit regulatory programs designed before the recent US oil and gas production surge.
“The recent volatility in [northeastern] gasoline prices and emerging volatility in the ethanol and RIN markets suggest she may be right,” EPRINC’s report concluded.
Contact Nick Snow at email@example.com.