ANALYSIS-U.S. gasoline joins fierce crude rally as oil market morphs again
NEW YORK, July 12 (Reuters) - U.S. gasoline futures have joined this month's blistering crude oil rally with a vengeance, staging their biggest gain in over two years as a string of unplanned refinery outages trips up traders.
The accelerating gains in gasoline, which jumped as much as 4 percent on Friday while crude barely rose less than 1 percent, are the latest sign of a wider rethinking of oil market fundamentals that has abruptly reshaped the market in just two weeks.
Crude oil futures on the New York Mercantile Exchange (NYMEX), which had been trading at a discount of more than $20 a barrel to Brent crude prices at the start of the year, are now trading $3 lower than the international benchmark. New York Harbor gasoline futures, which for years had been moving in sync with Brent, are now breaking higher on their own.
Both moves may say more about local market dynamics that global macro conditions: Just as the Brent gap has been erased by signs of a diminishing glut of crude at the NYMEX delivery point in Cushing, Oklahoma, the surge in gasoline follows unexpected outages at several East Coast refineries, forcing them to quickly buy extra fuel.
And both have been led by an intense scramble to buy prompt contracts, twisting markets into a steeply backwardated structure that suggests prices may ease in coming months.
Prices for August Reformulated Blended with Oxygenated Blendstock (RBOB), the benchmark that helps sets gas station prices across the nation, have jumped 14 percent since July 1 -- the biggest such rally in over two years, apart from a short-term expiry squeeze last September. They have handily outpaced Brent, which has gained just 4.5 percent over the period.
Suddenly retail gasoline prices, which had been drifting round $3.50 a gallon, near the lowest level since January, could bolt toward $4 if the current futures price holds.
"Refinery capacity is going down at the height of the driving season," said Andy Lebow, vice president at Jefferies Bache in New York.
Concerns about supplies are so great that front-month gasoline prices jumped 2 cents in the span of just 10 minutes on Friday, hitting their highest since March on news of at least three new refinery outages, and more signs that companies who normally sell fuel into the New York Harbor turned buyers.
The rash of outages threatens to sap supply just as consumer demand begins to accelerate. Worries over U.S. biofuel mandates has also caused biofuel credits to spike to record highs, threatening to add to refiners' costs and, likely, pump prices.
PLUMP NO MORE
Just two weeks ago the picture looked much different: Heading into the driving season, inventories of gasoline across the United States were plumb: nearly 10 percent more than last year, and 17 percent higher on the East Coast. The market was anticipating the start up of a long-idle unit at BP's large 405,000 barrel per day (bpd) Whiting, Indiana refinery to further bolster supplies.
But unexpected trip-ups have altered the outlook. As of Thursday, some 380,000 bpd of U.S. crude refining capacity was expected to be offline next week, according to data from IIR Energy, which tracks maintenance. That is 100,000 bpd more than estimate outages at the start of the week.
News of more outages has come thick and fast.
Output at a key 90,000 bpd gasoline unit at the biggest refinery on the East Coast, Philadelphia Energy Solutions' 330,000 bpd plant, was expected to be reduced for up to 10 days due to unplanned maintenance, Energy News Today Inc reported on Friday.
ENT also said the 115,000 bpd refinery in Come-by-Chance, Canada, would have to cut runs until next week because of a downed sulfur unit.
Earlier in the week, it was Irving Oil's plant in St. John, New Brunswick, Canada, which Genscape reported had shut its 25,000 bpd gasoline-making fluid cat cracker on July 6. ENT reported on Thursday St. John's second, larger 70,000 bpd catalytic cracker was preparing to shut down early next week.
Traders say Irving has been buying gasoline from the New York Harbor, the delivery point for the U.S. gasoline futures contract, lending further support to the front-month contract.
On the Gulf Coast, Valero said it had shut a FCC at its 290,000 bpd Port Arthur, Texas refinery for work for an undetermined period of time. And the biggest U.S. refinery, Motiva's 600,000 bpd Port Arthur, Texas plant, shut a 90,000 bpd gasoline unit on Thursday for an indefinite period of time.
BP's Whiting plant has exerted a push-pull force on markets.
And although the biggest crude distillation unit at BP's Whiting plant is up and running again, it shut a smaller 110,000 bpd unit for this week. It was unclear how long it would be shut, but CDU overhauls can last four weeks, however. The news depressed U.S. crude prices as traders feared lower Midwest demand for crude; but Chicago cash gasoline premiums jumped nearly 8 cents.
At the same time, analysts pointed toward weekly statistics from the U.S. Energy Information Administration showing a 2.5 percent increase in domestic gasoline consumption over the past four weeks.
The increase has took some experts by surprise, as fuel demand has been under pressure in recent years as motorists adjusted driving habits due to high prices and low growth.
"Everyone wrote it off for dead and it's reversed in the past two weeks, so, hey, we've got a demand situation in the U.S. and prices have rallied," Phil Flynn, analyst at Price Futures Group in Chicago.
EAST COAST SHUFFLE
Apart from the operational glitches, many East Coast refiners such as PBF Energy and Phillips 66 have been whipsawed by the sudden narrowing of the spread between U.S. crude futures and Brent <CL-LCO1=R>.
At more than $10 a barrel one month ago, it fell to less than $2 a barrel this week, the smallest spread since 2010, before a surge in U.S. oil output.
The large spread had made it hugely profitable for refineries on the East Coast to ship in cheap crude from the Bakken shale play by rail, allowing them to reduce imports of costlier imported crude based on Brent prices.
Not now. Railway shipments from North Dakota fell to just 68 percent of production in early July, down from 84 percent in April, according to oil industry information provider Genscape.
"The narrowing of the Brent-WTI spread has made rail uneconomical to the East Coast of the U.S. and Canada," said Bob Yawger, director of energy futures for Mizuho Securities USA Inc in New York.
It is not yet clear how deeply that narrower spread will eat into refiners' margins. While U.S. crude is expensive, Brent-linked barrels are a better bargain. The spread between New York RBOB gasoline and Brent futures <RB-LCO1=R> has surged from $14 a barrel to nearly $23 this week, the highest level for this time of year since 2007.
Further concerns about rail have emerged since the deadly Lac-Megantic, Quebec derailment at the weekend. The line, which had been carrying around 13,000 bpd of crude to Irving Oil's 300,000 bpd St. Johns refinery, has been shut indefinitely, although other rail shipments continue.
"At the least that route is going to be under the microscope, at worst it is going to be shut down and investigated," said Yawger. "That may take Irving offline a bit."
Amid the traditional supply and demand fundamental factors, a new wildcard is entering the mix of concerns oil traders say is driving up gasoline prices: ethanol credits.
Ethanol credits, called Renewable Identification Numbers or RINs, are required by the U.S. Environmental Protection Agency as proof of compliance with gasoline blending requirements for renewable fuels such as ethanol. If refiners and importers of gasoline do not blend enough ethanol, they must buy RIN credits on the open market to make up the shortfall.
With gasoline producers fearing a shortfall in these credits, RINs prices jumped from below 90 cents a gallon in early June to over $1.18 this week. Worries that gasoline makers might fact a shortfall for their RINs requirements this year have helped send prices up from 7 cents at the start of the year.
Refiners have warned they will either have to pass the rising costs onto consumers -- about 1 penny at the pump for every 10 cent rise in RINs -- or export more fuel overseas, thus dodging the ethanol obligation entirely.
Traders say importers of gasoline have at times this the year slowed overseas buying when RINs costs have spiked -- a painful result for drivers during the summer holidays.
"Export demand could be boosted by this ethanol RINs issue, where some refiners are exporting more and importing less," said Eric Lee, commodities analyst at Citibank.
(Additional reporting by Jeanine Prezioso; Editing by Marguerita Choy)