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BLOG: As gasoline demand hovers near record, prices are set to soften

This is the first in a new series of blog postings on the refining industry by Robert Sharp, editor of PetroChem Wire's daily Refinery Focus.

HOUSTON, July 21, 2016 -- Gasoline demand is up and is as high as it has even been, now coming in at 9.7 million b/d, according to last week’s US Energy Information Administration numbers.

Only a few years ago, gasoline demand was 8.6 million b/d or so, and in the good economic years before the recession of 2009, it was only about 9.5 million b/d.

Domestic crude oil production, meanwhile, is off about 1.054 million b/d versus last year, per the EIA.

So good demand and tighter crude should lead to stronger gasoline prices, one would think. The market consensus, however, is that gasoline season is over. Barring a hurricane or some other calamity, gasoline prices can’t go significantly higher and are likely to go lower.

Excessive Volumes

A combination of excessive volumes of gasoline and various naphthas, as well as other factors, will keep downward pressure on gasoline prices.

Total gasoline inventories for last week were 241 million barrels, up 16.7 million barrels over last year. In early May, total inventories were roughly 240 million barrels. This suggests while summer demand is good, inventories have still not been drawn down significantly.

Since May 2, NYMEX RBOB has dropped from 156.28 cpg to 136.37 cpg, a decrease of 19.91 cents. In the same period, Gulf Coast CBOB has gone from 141.03 cpg to 130.31 cpg, a drop of 10.66 cpg, according to PetroChem Wire data.

Again, all this took place in the summer driving season when gasoline demand was at near record levels.

Alkylate Predictor

One of the principal gasoline blending components is alkylate. It is a 92 octane, 5.5 RVP blendstock that is important for lower RVP summer grades of gasoline. Alkylate is seen by some as predictor of gasoline supply demand balances: the stronger alkylate is the more likely gasoline prices will go higher.

Since May 2, alkylate has fallen from 169.78 cpg to 154.37 cpg, along with the value of octane. The 87-93 spread has dropped from 19.75 cpg to 14.25 cpg.

As summer ends and fall begins, RVPs will rise, which means that more butane – a very high RVP blendstock – will be allowed in gasoline. Butane was assessed Wednesday by PetroChem Wire at 62 cpg.

One can think of it this way: expensive alkylate can be replaced, at least in part, by cheaper butane.

The change in RVP is reflected by the NYMEX RBOB market, where October is currently trading at 129.91 cpg, about 7 cpg below September.

So as summer gasoline demand winds down, gasoline will get less expensive to make, which should result in lower prices. -- Robert Sharp

PetroChem Wire assesses butane, alkylate, Gulf Coast gasoline and naphtha prices every day in the Daily Refinery Focus. To sign up for a free trial, click here.

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