US West Coast trading 'island' witnesses huge waves in the gasoline market

Up 35 cents over nine trading days. Down 55 cents over the next seven days. In most other US markets, these would be considered serious moves. In the West Coast, it's almost just another day at the beach.

"It's the West Coast, man," one trading source said. "When you want to explain to someone why gasoline changed so much, just say, 'It's the West Coast, man.'"

It's also the nature of an increasingly refinery-driven market, and export-driven to a lesser extent.

Los Angeles CARBOB, the main California-specific gasoline grade, entered May at June NYMEX RBOB futures plus 20 cts/gal, moved to plus 55 cts on May 11 and fell to flat by Tuesday of this week, as assessed by Platts. On Wednesday it jumped 13.5 cts/gal on the cash differential against a new trading month. (Obviously, the end price also is affected by swings in the outright NYMEX price.)

Eleven of those 17 trading days saw differential swings of 5 or more cents, or roughly $2/b, a fairly large shift in the cash market. But it's not unheard-of out West. August, September, October, November, February, March and April each had at least 5 days of such daily swings.

Differentials gained 43.75 cts/gal in little more than a month late last summer, dropped 40 cts/gal in a similar span in the fall, and gained almost 30 cts/gal in just one day in February before dropping 56 cents/gal over the next month. Those are swings of up to $12 to $24/bbl even before accounting for the underlying NYMEX contract.

It's not just Los Angeles. Portland unleaded nearly doubled its differential Wednesday as it traded at $1.10/gal over the NYMEX. That's $46/bbl over the June NYMEX, which itself was at $2.82/gal, or $118.50/bbl.

The common refrain among traders: "The West Coast is an island." Just like US weather patterns, the region is rarely linked to what happens elsewhere in the nation.

The other common refrain: "It's a refiner's market."

The West Coast is now nearing an end to an extended spring maintenance season coupled with outages at key refineries. Refiners used only 70.5% of their capacity in early April, the second-lowest weekly run rate since the US Energy Information Administration started keeping specific PADD records in June 2010. The government data also showed stocks last week hit a 13-year low as the summer driving season approaches. The fall season saw similar, though slightly less stark, stock and run rate trends on weak gasoline margins.

Still, West Coast distillates experienced similar data decay with little market volatility. Why the divergence? Several refiner-related reasons there, too. Start with a switch from summer-grade to winter-grade specifications and then back again in a time of high crude oil prices and extremely weak demand. CARBOB especially is a more liquid market, but it's also a tough California-specific gasoline grade. It doesn't travel well outside of California, unlike the more global diesel and jet fuel markets.

That's not to say exports and imports didn't play a strong role for CARBOB, which was introduced in 2004. A record low differential in late July attracted South American demand for California-grade gasoline and popped the spot market higher. The large February spike deflated partly due to Asian gasoline cargoes. And problems at Mexico's sole Pacific refinery created a need for quick cargoes in early May just as three San Francisco Bay Area refineries entered maintenance. Los Angeles spot CARBOB hit a three-year high at the time, and its San Francisco counterpart moved to a rare sharp premium over Los Angeles.

Players will cite many other factors for the bouncy gasoline market, from illiquid future markets to several active traders leaving the market. They may also shrug and say West Coast gasoline has always seen sharp trading waves. But it's unlikely they've seen the crests and troughs quite like the recent waves reaching the island known as the West Coast.

Tweet