Rule change will make US gasoline more fungible

The streamlining of US reformulated gasoline testing requirements will likely lead to greater fungibility between grades, leading to price convergence for grades with similar Reid vapor pressure (RVP) levels.

The Environmental Protection Agency (EPA) will no longer require US gasoline producers to meet a set of standards known as "Volatile Organic Compound (VOC)-controlled RBOB", which includes aromatics. Instead, testing will be limited to RVP, benzene and sulphur levels.

This streamlining means the only distinguishing factor between RBOB and CBOB will be different levels of RVP. RBOB, required in most metropolitan areas in the country will conform to a maximum 7.4RVP limit after ethanol blending. The pre-blending value is estimated to be around 6.4RVP. CBOB, typically required in non-metropolitan areas, transitions through 7.6-9RVP pre-ethanol over the summer depending on location and timing.

Market participants in the US Gulf coast, New York Harbor and Chicago markets are expecting the RBOB premium to CBOB to narrow with this year's new testing requirements. In 2019, VOC-controlled RBOB fetched as much as 46¢/USG over CBOB in the US Gulf coast in June, nearly 19¢/USG in Chicago in May, and over 9c¢/USG in New York Harbor in June.

This year, it is expected that blenders will only need to lower the RVP of CBOB to relabel as RBOB. Removing aromatics testing will allow blenders to use more components, such as reformate and butane, likely making the RVP adjustment more flexible.

While more options could ease —and cheapen— blending in theory, the price of gasoline depends on a wide variety of factors that are separate from the cost of production.

For instance, grades with tighter specifications could fail to fetch a premium in a well-supplied market, or easier-to-blend products may rise to match a premium grade if storage is tight. The biggest pricing gaps could take place at the height of the summer driving season, or if a blender found themselves long or short on blendstocks during an RVP transition season, leading to greater volatility.

By Chunzi Xu