Sam Fletcher
Senior Writer
Crude futures prices shot up 19% from early March through late April, with the June contract for benchmark US light, sweet crudes closing at a record $75.17/bbl on Apr. 21, up by $1.48 for the day after trading at $72.73-75.35/bbl during that session on the New York Mercantile Exchange.
However, US gasoline retail prices escalated by some 30% during the same 2-month period. That contributed to the rally of crude prices as traders feared supply disruptions from refiners' switching from methyl tertiary butyl ether to ethanol as a gasoline oxygenate and octane booster.
"A few of the bigger concerns include: Is there enough ethanol production to meet the new standards? Is there enough transportation infrastructure (rail cars, tankers, etc.) to move the ethanol to the blending areas? And will there be gasoline contamination issues within existing gasoline storage tanks as the industry draws down MTBE inventories and reloads with ethanol inventories?" said J. Marshall Adkins in Raymond James's Houston office.
"What we do know is that the change in gasoline formulas has left the market on edge," said Adkins. "For that reason, speculators have bid up the price of gasoline in recent weeks to capitalize on any disruptions."
In an Apr. 24 report, Adkins said, "While we believe there is the potential for localized gasoline shortages in the coming weeks, the probability of widespread shortages is remote, and the low gasoline inventory situation should improve through the summer. However, volatility in the gasoline market should help keep oil prices at or near record levels into the June timeframe, at which time the markets will then become more concerned with new sulfur regulations in distillate fuels such as jet fuel, heating oil, and diesel."
Reduction of supplies of reformulated gasoline (RFG) has already had an effect on gasoline prices, with traders bidding the price of RFG to "one of its highest spreads (compared to regular gasoline) in recent history," said Adkins. RFG usually trades at a small premium to regular gasoline, but that spread recently widened to more than 10¢/gal and could increase.
The rally in gasoline prices should help East Coast refiners such as Sunoco Inc., which suffered through a dismal winter market for heating oil due to record warm temperature. But Sunoco is likely to benefit in the second quarter as the changeover from MTBE to ethanol supports strong East Coast refining margins, said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.
Ethanol imports
Advocates have pushed for increased use of ethanol as a boon for US grain farmers and distillers. But Adkins noted, "The US will not be self-sufficient in its production of ethanol and will need to import additional supply from places like Brazil to meet RFG fuel standards." He said, "We believe that there will be plenty of ethanol available for blending given the right (higher) price, but higher ethanol costs will be passed on to RFG consumers, again adding upward pressure to gasoline prices."
He said, "While there appears to be enough ethanol available in world markets, the true problem in switching additives comes from the inability to use infrastructure designed for MTBE-mixed gasoline to transport ethanol-mixed gasoline to the consumer." However, Adkins said, "The increase in ethanol imports is expected to tax our rail, port, and tanker infrastructure. Additionally, ethanol-blended RFG must be transported and stored in different infrastructure from MTBE-blended RFG. Rail cars and tanker trucks must be calibrated to carry ethanol RFG, and ethanol-mixed RFG cannot be transported through MTBE-mixed RFG pipelines. All these restrictions could result in localized gasoline shortages should some infrastructure be unable to handle the new ethanol-blended RFG volumes."
Meanwhile, prompted by possible gasoline supply shortages in the five-county Philadelphia area, Pennsylvania Gov. Edward G. Rendell asked the Environmental Protection Agency for a temporary waiver allowing gasoline suppliers to sell fuel in that area that does not meet RFG guidelines. "We have information indicating that a major gasoline supplier in the Philadelphia area is reporting more than 160 'delivery-needed' alarms, and many more fuel outlets reporting that supplies are nearly exhausted," Rendell said in an Apr. 21 letter to the EPA. "In light of the circumstances, the requested [waiver] is clearly necessary to serve the public interest." Rendell also held a press conference at a retail gasoline outlet in Harrisburg, Pa., where he called on the federal government to protect consumers against gasoline price spikes.
(Online Apr. 24, 2006; author's e-mail: [email protected])
