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Special to CSNews from Brian Milne, DTN Refined Fuels Editor
OMAHA, Neb. -- Gasoline prices in California continue to find support on reduced output at state refineries, with cash basis levels strengthening alongside climbing benchmark futures values. A lower refinery run rate since late last year reduced gasoline inventory levels in the state and beefed up cash premiums to futures, and is converging with what looks to be the start of the pre-season rally by New York Mercantile Exchange Reformulated Gasoline Blendstock for Oxygen Blending (RBOB) futures to amplify the increase in spot price.
In stark contrast to a negative gasoline crack spread for most of the fourth quarter 2008, lower refiner run rates across the country reversed the spread to push the front-month RBOB futures contract to a steep premium with crude futures. In fact, the front-month RBOB-to-crude spread was marching towards $20 per barrel just ahead of Valentine’s Day, with the previous high established in July 2007. While a lofty level that will likely ease, analysts that DTN talks with expect production restraint by refiners, coupled with the typical price run-up in gasoline ahead of peak summer demand, to sustain a healthy premium by RBOB to crude, made more so by a bulging supply of crude.
Nationally, gasoline supply fell below the five-year average, while implied demand during the most recent four weeks has firmed against the comparable year-ago period.
In California, gasoline supply is 1.953 million barrels or 24.3 percent less than a year-ago at this time and, unless demand suddenly falls off a cliff, don’t expect the year-on-year deficit to narrow quickly. Refiners have maintained their closed-lipped policy on day-to-day operations, but it is well known in the market that fluid catalytic cracking (FCC) unit run rates have been reduced by both economics and for seasonal maintenance which is now underway.
During the second week of February, ExxonMobil was in preparation to return several units at its 149,500 barrel-per-day Torrance refinery near Los Angeles, shut at the end of 2008 for a planned turnaround, but the refiner remained mum on whether the gasoline-making FCC would be one of those units.
Valero reiterated it was maintaining a system-wide FCC run rate between 70 and 75 percent, with the company’s 170,000 barrel-per-day Benicia near San Francisco, and 135,000 barrel-per-day Wilmington near Los Angeles, refineries included. The hydrocracker at Benicia is also scheduled to shut for 14 days of maintenance in February.
Additionally, a lack of funds has prompted Big West of California, a subsidiary of Flying J, to wind down operations at its 70,000 barrel-per-day refinery in Bakersfield as it works through a bankruptcy filing.
During the first six weeks of 2009, refiners in California produced an average 522,000 barrels less gasoline each week than during the comparable period in 2008, representing a 7.2 percent reduction in the output rate. Refiners could be lured into producing more gasoline amid the surge in the gasoline crack, but previously scheduled maintenance along with the transition to lower Reid Vapor Pressure gasoline must also be considered. The move to lower Reid Vapor Pressure (RVP) rated gasoline requires tanks to be drained or otherwise transitioned to ensure fuel specifications are maintained, and could prompt lower production to accommodate the switchover.
L.A. spot gasoline meeting California Air Resources Board fuel standards made the transition to 5.99 RVP during February’s second pipeline schedule, a full month ahead of the RVP transition in the northern part of the state. San Francisco spot California Reformulated Gasoline Blendstock for Oxygenate Blending (CARBOB) is currently rated at 12.5 RVP, moving to 5.99 RVP during the second pipeline cycle in March. The differing fuel specs have helped to widen the L.A. premium to the Bay to 5.0 cents.
On Feb. 11, L.A. spot CARBOB traded at 52.0 cents and 53.0 cents premiums to March RBOB futures, steady from day prior, riding the increase in paper trade to a $1.7998 gallon close. CARBOB deals for fourth cycle specific February pipeline transit were concluded at 45.0 cents and 45.5 cents premiums to futures, with the basis strengthening 2.0 cents on the day in the backwardated market. March CARBOB in the L.A. basin traded at 25.0 cents, 25.75 cents and 26.0 cents premiums to April RBOB futures, edging up 0.25 cents on the session.
Since moving off December lows, branded barrels in both L.A. and San Francisco have been averaging less than the spot market. Agreed to allocation liftings can benefit both the supplier by increasing their visibility in forward inventory requirements and the buyer through less price volatility and ensured supply. In the current tight market in California, unbranded barrels are subject to increased volatility in both price and availability, and have mirrored the move in spot.
For further information, contact DTN at www.dtn.com.