In the US gasoline market, there are two main formulations for gasoline: Reformulated Gasoline (RFG) and Conventional Gasoline (CG), as required by a complex network of federal and state regulations. RFG is produced by blending 10% fuel ethanol with Reformulated Gasoline blendstock, called RBOB, the grade of gasoline deliverable against the NYMEX RBOB Gasoline Futures Contract. Similarly, Conventional Gasoline is made with a blend of 10% fuel ethanol and Conventional Gasoline blendstock, referred to as CBOB.
The US Environmental Protection Agency (EPA) administers the Clean Air Act (CAA) requirements, and various state agencies regulate their own specific air rules. Under the CAA, the urban areas with the highest levels of smog pollution are required to use clean-burning Reformulated Gasoline blended with 10% ethanol. These urban areas include the entire northeastern United States plus the California, Chicago, Atlanta, and Houston metropolitan areas. According to the EPA, it is estimated that 75 million people breathe cleaner air due to RFG.
On January 1, 2021, the EPA’s final rule focusing on streamlining existing gasoline, diesel, and other fuel quality regulations took effect. The action did not change the existing clean air standards but was written with the intent of maintaining the stringency of fuel quality, reducing compliance burdens for the both the industry and EPA, and potentially lowering fuel costs for consumers.
The most notable of these changes, as it relates to gasoline, is the simplification of the test methods for reformulated gasoline ‒ made by blending RBOB gasoline with ethanol. Previously, the “complex model” was used whereby the Volatile Organic Compound (VOC) performance standard was applied to measure emissions for reformulated gasoline. Instead, the EPA will require a maximum level of 7.4 psi for Reid Vapor Pressure (RVP) for summertime reformulated gasoline. This approach aligns reformulated gasoline compliance more closely with the standards that are in place for conventional gasoline. The streamlining of the EPA standards will provide for more flexibility for gasoline blenders and refiners and will drive more efficiencies in the quality testing procedures for delivery of RBOB gasoline in the New York Harbor market.
The RBOB Gasoline futures contract is the global benchmark and the world’s most liquid gasoline futures contract because it is the only gasoline futures contract to trade electronically around the clock. Average daily volume in May 2021 was at 202,140 contracts traded per day, with 389,810 outstanding lots of open interest.
Chart 2 below shows the price relationship between the March and April months for the RBOB Gasoline futures. Historically, the RBOB Gasoline April contract, which marks the start of more stringent summertime gasoline specifications, traded at a premium of approximately $0.20 cents compared to the March contract. However, at the expiration of the March 2021 contract, the spread narrowed settling at $0.074 cents lower than the April contract month.
RBOB Gasoline futures prices spiked up to nearly $2.22 per gallon (+4%) when CME Globex opened on Sunday evening after news broke of Colonial Pipeline being subject to a ransomware attack that shut down all pipeline operations on May 7, 2021. As service was restored on the evening of Wednesday, May 12, prices declined as much as 2.6% from an intraday high of $2.1827, settling at $2.0953 per gallon which corresponded to levels from the preceding week. Most recently, the June 2021 contract settled at $2.1501 per gallon, an increase of $1.1012 compared to the year prior.
In line with seasonal norms, gasoline inventories rose in the winter in anticipation of the summer peak driving demand. Inventories took an even steeper dive to 60.0 million in the week that ended on May 14, 2021 ‒ coinciding with supply disruptions due to the closure of the Colonial Pipeline. PADD 1 stock levels have since increased 340,000 barrels to 60.4 million in the week that ended on May 21, 2021 and are 11.3% below the five-year average in comparison to 2020 levels which were at 73.8 million barrels.
With the start of the summer driving season approaching, NYMEX RBOB Gasoline futures continue to be the leading gasoline benchmark that can help the oil industry hedge the price risk associated with “the new normal” in the global economy.
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