This latest episode of Driving Discussions focuses on the recent drop in gasoline prices, a new spec for RBOB gasoline and how refining margins have evolved.
Listen in as John Demopoulos, vice president of US refined products and Dave Ruisard, editor US Products, give an update on the US road fuels market.
John Demopoulos: Hello and welcome to "Driving Discussions." in this series, we'll discuss the forces that affect road fuels globally. And in this episode, we'll be discussing the recent drop in gasoline prices, a new spec for RBOB gasoline, and how refining margins have been evolving. "Driving Discussions" is brought to you by Argus Media, which is a leading independent provider of energy and commodity pricing information. My name is John Demopoulos and I'm the vice president for North American Refined Products here at Argus. And with me today is Dave Ruisard, editor of U.S. Products. So, Dave, tell us, gasoline prices have been coming off a bit lately, particularly, I guess the Gulf. What's been going on?
Dave Ruisard: You know, we had this really interesting thing, you know, at the end of the summer. We're really used to hurricane season. Then we had a tremendous number of named storms come through the system. And as you know, we actually ran out of regular names for them, and the last one coming up that went through the Gulf was a Hurricane Delta, made the switch over to the Greek alphabet. And this impact of these storms turned out to be not quite as severe as a lot of people expected and refineries are coming back online. So, you know, initially, prior to this, it's one of those buy the rumor, sell the fact situations where people went out and bought up barrels, prices rose, and right as the hurricanes passed over, and, you know, you, kinda, get into this start of lull in gasoline demand in the fall, the market's been steadily declining for Gulf Coast gasoline for the last couple of weeks.
John: And are we seeing refinery throughput rising at all in the Gulf? I mean, we got to those very low levels during the worst of the Covid crisis and the early stages of lockdown. How far of those refinery utilization rates picked back up?
Dave: Well, you know, the refinery utilizations have been steadily rising minus, of course, the ones that have been, sort of, mothballed until we see a return to normal demand. That's mostly happening in refineries that are less economically viable like on the West Coast. The bright spot though, however, has been distillates. You know, diesel demand's up about 8% which is a sign of an economy restarting and stocks are down about 5% nationally. So, that's pretty good. Also, on the Atlantic Coast, yields on gasoline and the margins for diesel production have been improving. And that's also a good sign, a great sign for refiners looking forward to moving through this whole Covid period.
John: And, of course, we've also seen the EPA finalize the streamlining rules for fuel specifications which is gonna mean technically a slightly different specification for RBOB gasoline or at least a new way of testing RBOB gasoline. Can you give us a bit of a sense for what that is and if there's any impact on pricing?
Dave: Yeah, I mean, in the past, you know, RBOB which is reformulated blendstock for oxygenate blending gasoline which replaced the old simply reformulated gasoline, the MTBE, and it was a bit of a nightmare for a lot of people to meet the specs on, and you had region one and region two, and it was a convoluted cluster of different variables to it. They're all really centered around what the tailpipe emissions would look like as this stuff got burned through people's engines. They're going to shift that, and they've simplified it. And it's basically just gonna look like a really low RVP for RBOB moving forward in the future, which is gonna make refining...that'll be the same spec north and south in the country. So, this is going to make it a lot easier on refiners. Other things though that were in that notice from the EPA is that they're actually talking about trying to unify specs in general across the nation. We'll see how far that gets, but, you know, whenever you've got less complicated specifications from one area to the next, that really opens up arbitrage opportunities and removes supply constraints.
John: Yeah. And certainly, I think we've heard a little bit about the idea that certain blendstocks may now be easier to push into the RBOB pool including, I guess, reformates. So, there may be minor cost benefits for some gasoline blenders and manufacturers. What about the RVO, Dave, the cost of the renewable volume obligation, the obligation to refiners in written terms when they produce a gallon of gasoline or diesel? That cost to them has been growing very considerably lately, hasn't it? What's the deal there?
Dave: Well, it's really interesting. You know, the renewable volume obligation's an issue for a lot of U.S. refiners. And one of the things that can happen is that as you, kinda, see less gasoline demand, you might be also dumping in less ethanol, but maybe you're still producing the same amount of gasoline as before. And that could cause problems where suddenly, you're out of whack with your obligations, but, you know, a strong RVO...we're sitting at 7 cents right now. That's the highest in two years. The one group that really benefits is all these markets that take U.S. exports down in Latin America. So, that gives them a cost savings. And, you know, when the U.S. refiners are out there competing against everyone else globally, it also gives them an advantage on the international markets for gasoline and diesel fuel.
John: Yeah. That's gonna be some heavily discounted export fuels. So, with the RINs I guess we're saying that it just...it comes down to supply and demand like with any market. You know, we're not seeing as many RINs being produced as the demand appears to be. Is that the right way of thinking about it?
Dave: Yeah. That's basically what I'm seeing right now. So, we'll see what happens the rest of this month of October. Hopefully, there's not any scary surprises at the end, right?
John: And small refinery exemptions, of course, if those hit, then prices go down. If the small refinery exemptions go away, prices pick back up again for the RINs and the RVO. How political is this? Is this something that the November election will impact much, do you think?
Dave: I think so. I mean, this is a real political hot potato and you really only have to look at the landscape of U.S. politics and realize that no matter who wants to be president, the campaigning starts every single year in Iowa, which is home of corn and home of ethanol, and keeping those voters happy in ethanol-producing states is really critical. Hence, you see a lot of these smaller refiner exemptions coming probably under more scrutiny than they had in the past because that's a big constituency for whoever's gonna be running for office.
John: Yeah. It's a very fine line, isn't it? It's balancing between the needs of the petroleum industry and the needs of agriculture and farming. So, it's a tough job that these politicians have.
Dave: Exactly. Exactly.
John: Dave, what about the West Coast diesel markets? I know that we've seen some more price moves lately. What's going on over there?
Dave: You know, we've got a pretty unusual situation happening out there. As you know, they have two types of diesel fuel, particularly in California. You have what they call EPA diesel which looks just like the ultra-low sulfur diesel in the rest of the country. And then they have a specialty CARB diesel which is the specs are regulated by the California Air Resources Board. This is actually cleaner than the EPA diesel. However, EPA diesel has been running at a pretty steady premium to CARB diesel right now, which really shouldn't be happening except there's a lot of export demand to send barrels into Mexico and other parts of Latin America off the West Coast right now. And it's really pushing that EPA diesel value above CARB diesel.
Now, why you wouldn't switch your contracts suddenly over to CARB diesel instead of EPA diesel if it's, you know, cheaper at the moment? It's a little bit of a head-scratcher for us, but sometimes these contracts can be pretty strict about what they actually want and what they're actually gonna receive.
John: Yeah. And I think I remember that reclassifying CARB diesel as EPA diesel can be a very cumbersome and difficult process. So, I guess that might help maintain the spread between those two, even though, as you say, it's counter-intuitive for the looser specifications to be more expensive.
Dave: Complicated and regulations seem to go hand in hand for the fuels business.
John: Amen. There's probably a need for some more streamlining there.
Dave: Yeah, there we go.
John: Fingers crossed. Dave, thank you for this. And if you enjoyed this podcast, please do be sure to tune in for the other episodes in this series, "Driving Discussions." And for more information on Argus' global refined products coverage, please visit argusmedia.com/oil-products.