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Today in Energy

March 2, 2016

California wholesale gasoline price falls before switch to summer-grade gasoline

graph of gasoline spot and futures prices, as explained in the article text
Source: U.S. Energy Information Administration, based on Bloomberg

The spot price of wholesale gasoline in Los Angeles fell as low as 66 cents per gallon (¢/gal) on February 18, the lowest spot gasoline price in the nation and something that has only occurred on 24 days in the past 10 years. From February 12 to February 23, the Los Angeles spot price for California reformulated oxygenate blendstock (CARBOB, the petroleum component of gasoline in California) remained the lowest in the nation. On February 23, the specification for CARBOB switched to summer-grade gasoline, which resulted in a one-day price increase of 57%, from 68¢/gal on February 23 to $1.20/gal on February 24.

Gasoline markets on the West Coast, especially in California, are usually tightly balanced and are relatively isolated from alternative sources of supply. This tight balance is typically evident in higher spot gasoline prices compared with the rest of the nation. In 2015, after a major unplanned refinery outage, the Los Angeles CARBOB spot price averaged a 32¢/gal premium over the New York Mercantile Exchange (Nymex) reformulated blendstock for oxygenate blending (RBOB) futures price. However, when California begins the seasonal change from winter gasoline specification to summer gasoline, the markets and prices can exhibit unusual patterns.

Federal regulations, and, in some places, more-stringent state or local regulations, specify the properties of finished gasoline (gasoline that has been blended with ethanol) that can be sold at retail stations across the United States. Many specifications, like octane rating, remain constant from season to season. However, Reid Vapor Pressure (RVP), a measure of how easily petroleum liquids evaporate, changes to accommodate seasonal temperature variations that affect both the performance of gasoline in an internal combustion engine and emissions. In the winter, higher RVP ensures that gasoline combusts easily at very low temperatures. In the spring and summer, a lower-RVP gasoline prevents vapor lock, when too much vapor may prevent an engine from starting, and it reduces evaporative emissions into the atmosphere that contribute to smog.

The timing of the shifts from winter-grade to spring-grade gasoline and from spring-grade to summer-grade gasoline vary by region. The transition happens earlier in areas of the country where temperatures warm earlier in the calendar year, like Southern California. In addition, refineries begin manufacturing spring-grade and summer-grade gasoline well before the date when regulations require it be available at retail stations, because the lower-RVP gasoline blendstock must move through the distribution system before the lower-RVP retail requirement deadline arrives.

Because petroleum product pipeline systems closely monitor and control the quality and composition of the products being shipped, pipelines play an important role in the RVP transition. Petroleum product pipelines have shipping calendars divided into cycles, and the pipelines determine the maximum RVP allowed into their system during a given cycle.

In California, for example, pipelines require RVP of gasoline to transition from the December-January specification of 15 pounds per square inch (psi) to 13.5 psi in February and March, and down to 5.99 from April to October. In November, the RVP goes up again, to 13.5 psi.

In cases where there is excess supply of higher-RVP winter gasoline near the transition deadline, market participants may lower prices for that type of gasoline to move it out of inventory before the RVP changeover. The opposite may also happen when supplies of higher-RVP blendstock run short before the changeover date. Once the transition occurs, prices adjust to reflect the balance of supply and demand for the new gasoline grade.

graph of RVP transition, as explained in the article text
Source: U.S. Energy Information Administration, based on Thomson Reuters

Principal contributor: Mason Hamilton