WHAT DRIVES PETROLEUM PRODUCT PRICES? – Prices and Crack Spreads

Onyx Power and Gas Consulting continues a weekly series providing the Short Term Energy Outlook as of January 10,  2016.  This series of news articles should provide a complete insight on the current conditions of the energy…enjoy, check out archives and come back each week for additional information on how all sorts of energy sources impact our daily lives.

What drives petroleum product prices: Prices and Crack Spreads

Gasoline is the most widely used petroleum product in the United States. Although gasoline is traded globally and priced at various locations around the world, all these prices tend to move together in the long run because gasoline can be transported between markets, thereby linking their supply and prices. Differences in absolute price levels as well as short-term price changes across the world reflect varying gasoline specifications, refinery maintenance schedules, unplanned refinery outages, transportation constraints, peak consumption seasons, as well as regional inventory levels.

Distillate is also traded globally and priced in various regions around the world. Like the disparity in gasoline prices, the disparity in distillate prices primarily reflects differences in quality, primary uses, seasonal consumption, and local market factors.

In addition to trading physical quantities of petroleum products, market participants can also use futures contracts to buy or sell gasoline and distillate for future delivery, or to hedge or speculate on future price movements. Since 2006, the underlying commodity for the gasoline futures contract has been reformulated blendstock for oxygenate blending (RBOB), the petroleum component of gasoline in many areas of the country prior to the addition of ethanol to produce finished gasoline.

Since the spring of 2013, the underlying commodity for the distillate futures contract has been ultra-low sulfur diesel (ULSD), a distillate with sulfur content of less than 15 parts per million (ppm). Prior to this change, the underlying commodity for the distillate futures contract was allowed to have sulfur content up to 2,000 ppm, reflecting the type of distillate commonly used for home heating purposes.

Crack spreads, which represent the price difference between products and crude oil, can be used to determine the relative value of various petroleum products for refineries to produce. Crack spreads vary by product and can rise or fall depending on the time of year and on market conditions.

Seasonality

Petroleum product crack spreads often exhibit seasonality. During the summer months, the underlying commodity of the RBOB front month contract is required to be gasoline with a lower Reid vapor pressure (RVP) specification, a more expensive type of gasoline to refine. Starting March 1, RBOB futures prices tend to increase several cents from February averages to reflect the higher valued commodity. This, in turn, is reflected in a higher crack spread. The crack spread continues to remain fairly high through the late spring and into the summer months as the U.S. driving season picks up, resulting in higher domestic demand for the product. On September 1, the underlying commodity of the RBOB front month contract reverts back to a higher RVP specification, representing a lower-cost gasoline. The gasoline crack spread declines to reflect the lower price of gasoline.

As domestic gasoline consumption declines during the winter months, distillate consumption historically rises as consumers in the United States, particularly in the U.S. northeast, use distillate for heating purposes. With the increased demand, distillate crack spreads are usually highest from October to February.

The professional consultants at Onyx Power & Gas Consulting are always ahead of the current issues that may affect energy consumption and pricing. Now is the time to partner with an Onyx professional consultant to discuss energy management and secure energy prices based on today’s stable pricing.  Volatility in the energy markets makes it too precarious to take chances.  Partner with Onyx Power & Gas in Making Energy Make a Difference!

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