Analysis: Midwest Gasoline Prices Tank Despite Low Stocks


   
Barani Krishnan
DTN Refined Fuels Market Reporter

   SECAUCUS, NJ (DTN) - The Midwest transition to winter-grade gasoline has 
weighed heavily on regional prices of the fuel, despite government inventory 
data suggesting the market is not oversupplied.

   Gasoline cash values across the PADD 2 region have tumbled double-digits 
this week as traders priced in seasonal higher Reid Vapor Pressure (RVP) 
blendstocks meant for the winter, DTN fuels pricing data showed.

   Gasoline's conventional blendstock for oxygenate blending, also known as 
CBOB, on the Wolverine pipeline system showed the steepest fall over the five 
trading days ended Thursday (11/12), shedding nearly 39 cents, or almost 14%, 
on a weekly average basis. Chicago CBOB, meanwhile, lost almost 35 cents, or 
13%.

   On the Buckeye Complex, another major PADD 2 pipeline, CBOB slid nearly 
34cts, or 12%. Group 3 V-grade gasoline in the Midcontinent dropped around 
33cts, or 12% as well.

   Despite the market trough, federal data indicates Midwest gasoline supply is 
only beginning to recover from historic depletion rather than swelling into an 
oversupply.

   PADD 2 gasoline stocks rose by 1.9 million bbl to 42.9 million bbl during 
the week ended November 6, Energy Information Administration (EIA) data showed 
Thursday (11/12).

   That increase lifted stocks from the previous week's record low of 41 
million bbl, the lowest reading since EIA began tracking the data in December 
1989.

   Even with the weekly rebound, PADD 2 gasoline stockpiles remain 700,000 bbl 
below the 43.6 million bbl recorded during the same week last year.

   Andy Lipow, president at Houston-based Lipow Oil Associates, attributed the 
pricing weakness to refining economics rather than a physical storage glut.

   "Generally speaking, the difference in price between summer and winter grade 
gasoline is 12 to 15 cents as refiners use additional quantities of less 
expensive butane in their formulations," Lipow told DTN, explaining the current 
discounting.

   A Midwest fuels trader concurred, saying cash differentials for local CBOB 
had climbed "way, way too high" entering November amid unusual intra-month 
backwardation.

   "One side's going to catch up with the other, for sure," the trader told 
DTN, referring to the gap between falling spot differentials and the EIA 
storage numbers for PADD 2 gasoline.

   Adding pressure to Midwest pricing was Canadian crude, which had declined to 
near-record lows, trading more than $31 bbl lower against ICE Brent. 

   This enables PADD 2 refiners to discount CBOB as an offset to cheaper 
feedstock. Further pipeline capacity - including Buckeye's reversal of the 
Laurel Pipeline into eastern Pennsylvania - has allowed Midwest suppliers to 
clear excess winter fuel toward the East Coast.

   PADD 2 refinery runs have contributed to the higher supply as well, rising  
4.0 percentage points during the week ended November 6 to 96.9%, while refiner 
crude inputs rose 244,000 bpd to 4.140 million bpd, the EIA data showed.

   But market participants are also bracing for price volatility in the event 
of any unanticipated disruption in gasoline production. "With low inventories, 
gasoline prices are susceptible to spikes with unscheduled refinery outages," 
Lipow said. "Even a short outage might require several weeks for the supply 
situation to get resolved." 




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