FocusUS summer gasoline prices to surge on production costs, demand

29 March 2011 21:25  [Source: ICIS news]

By Sheena Martin

HOUSTON (ICIS)--Higher costs for US refiners along with habitual increases in demand will provide a boost to US gasoline prices beginning in April, consultants said on Tuesday.

“Gasoline prices increase during the spring into early summer because demand increases,” said Dan Lippe, founder of consultancy PetralWorld. 

“The reduction in vapour pressure causes refineries to eliminate normal butane as a gasoline blendstock," he added. "This tends to make production costs somewhat higher during the summer.” 

The US Environmental Protection Agency (EPA) requires gasoline with a Reid vapor pressure (RVP) of 7.8 or 9.0 psi, depending on the region, from 1 June to 15 September. In the US winter months, gasoline can have a vapour pressure from 11.5 to 13.0 RVP.

Normal atmospheric temperatures are about 14.7 psi, so the government requires gasoline with a lower vapour pressure in the summer to prevent the higher temperatures from causing the gasoline to evaporate and emit pollution.

“The composition of finished motor gasoline does not change much from winter to summer - except for the elimination of normal butane from the gasoline pool,” Lippe said.

Butane has a vapor pressure of 52 psi but is favoured among blenders for its low costs. Currently, normal butane is around $1.78/gal, while oil breaks down to about $2.35/gal.

Senior energy analyst Phil Flynn with brokerage firm PFGBest said this transition of blends adds about 10-15 cents/gal every year.

Typical summer gasoline blends are purer oil with a higher percentage of straight run, alkylate and fluid from the gasoline-making unit - the fluid catalytic cracker (FCC) - and about 2% butane.

“Refineries generally run the FCC units at higher severity rates, and the gasoline components from the FCC units account for a higher percentage of the total gasoline during the summer than during the winter,” Lippe said.

To keep FCC rates at maximum levels, refiners purchase more feedstock for the unit in the spot market, which often contributes to the higher products costs, he said.

In addition, since more fluid from the FCC is used in each gallon of gasoline, the higher run rates of the unit still cannot keep up with summer demand.

“The key factor that tends to push gasoline prices higher is the seasonal swing in the supply and demand balance,” Lippe said.

The transition is from seasonal minimum demand in January and February to seasonal maximum demand in June, July and August. Lippe said the typical increase from the first quarter to the second quarter is 6% to 8%.

Furthermore, the transition to the summer gasoline blend can result in gasoline supplies coming up short as winter gasoline is sold off and summer gasoline is produced.

“The switch to the summertime blends is like a federally-mandated shortage,” Flynn emphasised. “Refiners have to draw down supply and the process is more expensive.”

Production from domestic refineries does not usually cover the increase in demand, particularly for the US east coast, resulting in imports of gasoline from refineries globally, Lippe said.

“[This] thereby directly impacts the global gasoline supply and demand balance,” Lippe said. “US consumers are, essentially, paying to buy gasoline supply away from other regions [of the world].”

Historically, these factors have combined to raise gasoline prices in a range spanning from 14 cents/gal to 66 cents/gal.

From 2000 to 2009, the average rise in the retail price was about 33 cents/gal from the first quarter to the second quarter, according to the US Energy Information Administration (EIA).

By: Sheena Martin
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