Analysis: US refiners seek octane as premiums soar

US refiners like Valero and Marathon Petroleum are weighing ways to boost high-octane gasoline output amid strong premiums for the blend.

Premiums that high-octane gasoline commands over regular blends this month have soared in the New York Harbor and Gulf coast, according to Argus assessments. But it is not a simple trend of luxury vehicles demanding the fuel.

A combination of blending economics, maintenance and regional crude selections have sapped supply as US high-octane gasoline demand shows its strongest growth in a decade. US refiners expecting that demand to continue to grow have already studied small modifications to their facilities as the shift to octane demand affects both transportation and petrochemicals markets.

"We're very balanced at this point in time, but we really see this growing in the future," Marathon Petroleum chief executive Gary Heminger said.

Premium gasoline remains a small volume of the overall US gasoline market. Sales through the first five months of the year, the most recent period available, were 10.8pc of total US gasoline supplied, according to the Energy Information Administration (EIA). Demand for premium gasoline remains well below highs seen in the early 2000s.

But premium gasoline demand through that period was 12.2pc higher than the same months of 2014 and 14.5pc higher than the ten-year average for the period, according to the EIA. Regular gasoline demand, by comparison, was 3.2pc higher than year-ago volumes and just 0.2pc more than the ten-year average.

Northeast retailers in particular have seen a strong increase in demand, selling almost 25pc more than a year earlier. Even in California, where refining issues and regional gasoline demand have kept regular gasoline prices sharply higher than the rest of the country, demand for the more expensive premium gasoline increased by 15.1pc compared to 2014.

Lower retail gasoline prices have helped to rekindle driver interest in the higher-octane fuels manufacturers recommend for their vehicles, said John Auers, senior vice president for consultancy Turner, Mason Company.

"Ultimately, it's a demand issue," Auers said. "People are making decisions to buy premium when they might have not, when prices were higher."

Blending economics have also placed drivers needing higher-octane fuels in competition with regular gasoline customers and overseas markets.

Blenders may follow myriad recipes to produce the dominant US fuel. While the US requires tougher specifications, particularly on sulfur, than some foreign markets, many blendstock combinations can meet the standard.

Naphtha, a low-octane gasoline blendstock available in abundance thanks to the US shale boom, this month reached its widest discount to its processed counterpart in the seven-year history of Argus assessments on the product. Such differentials encourage blenders to buy a more costly, high octane blendstocks and mix it with very cheap low octane feedstock to produce regular gasoline.

And exports to Mexico, the largest US gasolineexport destination, have also affected octane demand. The country's gasoline has a minimum requirement for octane-enhancing olefins. Octane premiums soared in part as Mexico sought cargoes to cover fuel shortages earlier in July.

Demand has helped to swing prices commanded by premium compared to regular gasoline to some of their strongest sustained levels in the past five years, based on Argus assessments. The New York Harbor premium-regular gasoline spread reached 57.75¢/USG on 22 July, its largest spread since September 2012. The US Gulf coast spread peaked earlier this month at 47.575¢/USG, its highest level since October.

Responding to the prices, some refiners have stopped separating toluenes and other octane-enhancing components sought by the petrochemical industry from their gasoline streams this summer. Octane has essentially set the prices for those components.

Demand for octanewill continue to be linked to gasoline demand, Auers said. Auto manufacturers under pressure to make higher-mileage vehicles will need high-octane fuels for the most efficient small engines to comply with future Corporate Average Fuel Economy (CAFE) standards.

So refiners have studied their octane-producing equipment — reformers and alkylation units — to wring out extra yield of those materials. The conditions have supported Valero consideration of a new alkylation unit at its 90,000 b/d refinery in Houston, Texas. Phillips 66 said it was "watching the market to see if there's a need for a larger solution."

And Marathon Petroleum sees a strong opportunity to gather octane unit feedstocks moved through MarkWest, the largest natural gas liquids (NGL) company in the Marcellus and Utica the company is acquiring for $15.8bn. The refiner could manufacture octane for markets throughout its midcontinent and Gulf coast retail footprint, rather than move NGLs to major refining centers and back again.

"We see, going out to meet the CAFE standards of 2022, that the industry is going to be short octane," Heminger said. "I think it makes more sense to manufacture and then distribute that octane into the gasoline pool that is already in this market."

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