Winter is coming ... to narrow US gasoline spreads

Perhaps the most confusing thing about US gasoline is all the changes various markets undergo. Requirements for the country's most-used fuel change depending on the time of year and location, with markets in the same state often setting different standards.

While the biggest factor is Reid Vapor Pressure (RVP), a measure of volatility, producers and blenders must also keep in mind octane rating, oxygen and sulfur levels, and an assortment of other things. All of those factors influence what blendstocks are best suited for the particular time of year and location, which can drive prices for products that aren't directly connected to the gasoline pool like natural gasoline and butane.

The best example of the calendar's impact on gasoline is New York Harbor, the trading hub for the roughly 3.5 million-4 million b/d of gasoline demand on the US East Coast.

On August 4, the premium for physical RBOB over CBOB at New York Harbor narrowed by 1 cent/gal, a sizable move in a tightly traded market. At first glance it might seem odd that the more expensive grade would lose so much value so quickly to its normally cheaper counterpart. But the market is simply following its historical pattern.

For the last several years, the delta between RBOB and CBOB started to dramatically tighten in the middle of August, eventually narrowing to parity in the winter. During this period, when US gasoline demand is at its lowest, the price spread occasionally inverts, marking one of the few times CBOB commands a premium to RBOB.

So, why does that happen?

Most major cities along the upper East Coast are federally required to use RBOB-based gasoline, like Boston, Philadelphia and Baltimore. During the summer, those cities also tend to require a low RVP — the lower the RVP, the less vapor the fuel emits. Blending RBOB into a low-RVP finished product is expensive.

On the flipside, lower population areas like upper New York or eastern Pennsylvania can use a CBOB-based fuel and don't have such stringent RVP standards, which makes for a cheaper fuel.

When winter rolls around, gasoline throughout the East Coast, in high and low populations, can have a high RVP. With ubiquitous standards from late September through early April, the difference between RBOB and CBOB becomes minimal. And since CBOB is used across a wider part of the country, demand for it occasionally outpaces that for RBOB.

Similar patterns play out in the Gulf Coast and Chicago gasoline markets, though they're not as pronounced as the East Coast. California is too different from the rest of the country to even factor in; it would be like comparing apples and onions.