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Fun fact of the day: refiners, generally speaking, don’t make gasoline.

Drivers may think that crude oil goes into a refinery and gasoline comes out.

That’s only partially correct. Think of making gasoline as making a cake. There’s flour, eggs, milk, and oil in a cake recipe. Gasoline is similar in that it has multiple components that make up the gasoline recipe. At the end of that recipe you have two types of almost finished gasoline called Conventional Blendstock for Oxygenate Blending and Reformulated Blendstock for Oxygenate Blending.

To these blendstocks other liquids are added to make the substances that fuel our carpools, take us to grocery stores and get our families to their summer vacations. And, mostly, that final mixology does not happen at the refinery level.

The Mixers: CBOB and RBOB

To reiterate, most of the gasoline produced by refineries is actually unfinished gasoline or gasoline blendstock.

Blendstocks are blended with other liquids, such as ethanol, to make finished gasoline.

Most of the finished gasoline in the US contains 10% ethanol.

The blendstocks are a mix of components such as butane, reformate and FCC gasoline, which can be combined in different ways to reach needed specifications.

Conventional Blendstock for Oxygenate Blending (CBOB) is a blendstock that’s combined with ethanol to get E10 gasoline.

Reformulated Blendstock for Oxygenate Blending (RBOB) becomes reformulated gasoline (or RFG) after blending with ethanol.

What’s the Difference Between RBOB and CBOB?

Reformulated gasoline is required in certain areas to reduce smog per Clean Air Act amendments. RFG is required in cities with high smog levels and is optional elsewhere. RFG is currently used in 17 states and the District of Columbia. About 25 percent of gasoline sold in the US is reformulated.

Many of the RFG areas are in the mid-Atlantic and Northeast. So, OPIS spot market editors see a lot more Reformulated Blendstock for Oxygenate Blending (RBOB) trading in the New York Harbor region.

In the Gulf Coast spot market, Conventional Blendstock for Oxygenate Blending (CBOB) tends to be the most liquid product because there are fewer areas requiring RFG in that region.

Where Does Ethanol Enter the Picture?

Ethanol is like the icing on that cake made from gasoline. (Eww. Please don’t eat it.)

The use of ethanol is largely linked to the advent of the Renewable Fuel Standard (RFS) program, which Congress enacted to reduce greenhouse gas emissions, expand the US renewable fuels sector, and diminish US reliance on imports.

Ethanol isn’t blended into gasoline blendstock at the refineries, largely because ethanol can’t be transported through pipelines. It would damage them. Strong stuff!

Instead, ethanol is most often blended in at the rack, closer to its ultimate destination. That’s why you’ll often see ethanol listed along with gasoline and diesel in rack prices.

Ethanol serves to boost octane levels in gasoline, which can be helpful. But it also raises Reid Vapor Pressure (RVP), which can be tricky.

RVP measures the volatility in gasoline and is subject to seasonal mandates. So, blending ethanol can be complicated during summer months, when people are looking for lower-RVP gasoline.

Sometimes, detergents or other additives are blended into gasoline before it hits retail stations—those additives are a way that fuel brands differentiate themselves with customers.

Happy baking!

As the weather warms up with summer on the horizon, US gasoline prices will likely follow the season’s temperatures and start the cyclical rise as well.

Why does gasoline typically cost more in warmer weather months?

One of the biggest reasons for the price change is RVP, or Reid Vapor Pressure. It’s a measure of gasoline volatility. For those technically inclined: the number is the absolute vapor pressure of a liquid (in this case gasoline) at 100°F (37.8°C) as determined by the Reid method. In layman’s terms, it’s the ability of gasoline to vaporize so it can be used in your car’s engine – which changes with the outside air temperature.

That seasonality is a big part of the reason gasoline gets more expensive as temperatures increase. The lower the RVP, or the lower the volatility, the more expensive it is to make on-road gasoline. The summer months, when ambient temperatures are higher and gasoline evaporates quicker, require a lower pressure. In colder temperatures, gasoline with a higher RVP is preferred for winter driving.

Apart from car performance needs, the US Environmental Protection Agency, or EPA, sets standards for summer RVP levels to reduce emissions from evaporating gasoline, which can contribute to smog.

Part of understanding RVP is understanding how gasoline is made.

Gasoline isn’t just refined and ready to be put into your car’s gas tank. It must be blended with multiple components to make something that is able to be used on the road – like baking a cake with many different ingredients. And all those ingredients – or blending components in the gasoline-making world – must add up to a final product that you can put in your car, meeting all the specifications that make sure it’s up to snuff. And all those components affect the final product in different ways.

For example, take butane – a popular component for blending gasoline in wintertime. Butane is an inexpensive way to increase the octane (which means the resistance to knocking or uncontrolled ignition within a car’s engine) in your blend of gasoline. However, butane also increases the RVP level, so it is mainly used in the winter months, when RVP specifications are high.

So how does this affect the cost of gasoline, from the retail station to the wholesale racks to the big bulk gasoline markets?

Those less expensive (and sometimes more plentiful) blending components like butane, which can be used during cooler weather, help to keep the price of gasoline down at the pump. But as the weather gets warmer, some of those components aren’t going to be able to be used and more expensive options will have to be utilized.

Typically, consumers start to see prices head higher in the spring and early summer as blends make their way to the pump gradually as the weather warms – with timing that can vary by region. The change at your local gas station can depend on several factors besides the change in RVP, like local margins, competitive factors, etc.

But upstream, those changes start much sooner than they do in the retail sector. In the rack markets, where marketers go to load up their fuel trucks, usually the specification shift happens in spring as markets across the country start to supply the lower RVPs (LRVP). In 2024, OPIS Rack Reports will start to reflect LRVP starting as early as April 1 and continue through September 15 for most areas. The EPA mandates that terminals are fully switched over to summer-spec fuels by May 1, but refiners often start the process earlier.

Every city in the US is required to switch to a 9.0-lb. RVP gasoline in the summertime, with several areas across the country requiring even lower (and more expensive) RVPs. For example, the Sparks/Reno rack in Nevada will only show 7.8-lb. RVP products and the Detroit, Michigan, rack will only show 7.0-lb. RVP material.

Even further upstream from the rack markets, in spot markets, where large volumes of incremental material change hands (i.e. trades of 5,000 – 25,000 bbl or more), the RVP shift takes place even sooner.

As of March 1, 2024, California CARBOB gasoline has already moved to a 5.99-lb. RVP gasoline for the summer. East of the Rockies, Group 3 is showing an 8.5-lb. RVP specification, while Gulf Coast markets are showing a transitional, 11.5-lb. RVP grade product to help downstream customers blend tanks to lower RVPs but will see summer-spec gasoline appear in early March. Chicago and New York Harbor markets are still showing a winter-grade, 13.5-lb. RVP, summer grades of gasoline making their appearance later in March.

RVP transitions play a large role in the changing price of gasoline, as regulations must be met to have viable gasoline product for use at the pump. But there are a myriad of other factors that can mitigate or exacerbate any of those changes – including geopolitical influences, price movement of futures contracts, weather events, regional supply disruptions and refinery issues, to name just a few.

OPIS provides several tools to help keep abreast of the changing prices and regulations, such as the OPIS Spot Ticker, spot market reports, rack reports and retail data, as well as alerts for breaking news that can influence the price of gasoline.

If you are reading this, chances are good that you have recently started subscribing to one of our rack services or are interested in doing so.

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OPIS customer service super sleuth Regina Flake barely had time to put down her coffee when the call came in early Saturday morning….

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Once fuel leaves the refinery gate, the next step in the price chain is the wholesale rack. (more…)

Buying fuel is confusing even for seasoned pros. We’re here to help.

The petroleum market features a slew of specialized fuel blends and no one-size-fits all requirement for what you can use — or where or when you can use it.

Whether you are new to the fuel industry or are already an expert, the words “spot,” “rack” and especially “basis” are terms that confuse even the most veteran buyer. There’s a good chance you or someone on your team may not be 100% sure what these words mean.

Why Is It Important to Understand These Fuel Pricing Basics?

 

Chances are you already have a fuel contract with a supplier in place. Maybe you are looking to set one up or modify one that already exists. Without a firm handle on what the difference is between futures, spot, rack and retail markets there’s a good possibility that you:

Let’s clear up some confusion with a basic guide to pricing gasoline and diesel. Much of what you will learn here also applies to jet fuel, LPG and renewables.

fuel-buying-101-snippet

Step One: Getting to Know the Futures Market

Before you can understand spot and rack prices, you need to understand the first piece in the downstream fuel puzzle: The New York Mercantile Exchange.

The industry commonly refers to this as the NYMEX or the Merc. Sometimes it is called “the futures market” or “the print.”

It’s a mostly electronic platform exchange, on which buyers and sellers can trade various fuel commodities — on paper — any time from a month from now to 18 months in the future. That’s why it’s called a “futures” market.

They call it a “paper” market because few, if any, physical barrels ever change hands. Trade volume is made up of contracts that transact among players.

From here on out, to reduce any further confusion, we’ll refer to it as the NYMEX. The NYMEX is possibly the most influential factor in the upward/downward movement of wholesale rack markets. Oil futures affect spot markets, then rack markets, then ultimately retail markets.

The first energy contract was launched in 1978. Since then, the Merc’s launched contracts for:

These abbreviations are what you’ll see on the trading screen, so add them to your alphabet soup full of acronyms to memorize.

Thanks for the History Lesson But What’s In This for Me?

One word: Transparency.

The NYMEX really took off as a major factor in the U.S. petroleum market back in the 1980s because it was the only place refiners, suppliers, traders, jobbers, retailers and procurement end-users had full access to see the value of a commodity at any given time.

The transparency was generally not for real barrels of crude oil that you could turn into gasoline. Remember, this is mostly a paper market – physical delivery only occurs for 2% to 3% of all contracts on the current NYMEX. But, at that time, unlike today, there was no downstream price discovery.

So, the futures market became a place where fuel buyers or sellers could go to find a cost basis for fuel supply agreements. This is why, when we talk about the NYMEX, we start to introduce the concept of “basis.” More on that later…

Since the 80s, price transparency has extended to the spot market (the refinery level) and rack market (the wholesale level). We’ll dive deeper into those markets in the sections that follow. But, that clear level of transparency has always remained on the NYMEX.

In addition, the exchange is regulated by the CFTC (Commodity Futures Trading Commission), adding a level of accountability to every 1,000-barrel, or 42,000-gallon, contract traded.

The paper market is used to hedge physical fuel purchases – kind of like insurance for prices rising or falling, to protect the companies holding contracts from losses related to their physical energy business. But, for our purposes right now, the critical point is that it is the primary building block of
downstream gasoline and diesel pricing.

There are two other key elements about the futures market:

  • First, the trades are anonymous.
  • Second, and most importantly, the exchange guarantees counterparty performance. No chance of an Enron-like implosion here.

fuel-buying-101-isaacHowever, the Block Is Rarely Stable

Military conflicts, hurricanes, domestic refinery problems, fluctuations in domestic output abound. Often, the first trace of any breaking news is seen on the futures screen, because oil prices spike and dive.

Take a look at this chart to see how Hurricane Isaac sent futures flying and how the market volatility continued.

The NYMEX tends to react to big-ticket items, like:

Sometimes the market “prices in” so-called fundamental factors. For example, if the U.S. government is expected to show crude stock supplies falling by a large amount, the market might slowly crawl higher in advance of the weekly inventory report as opposed to rallying sharply when expectations prove true. On the other hand, a quickly developing weather event can lead to immediate price swings.

And the market also responds to seasonal trends. For example, the RBOB market tends to peak ahead of summer driving season. The ULSD contract (a proxy for heating oil) will often spike on the first chilly fall day.

Some terminology you will hear when people talk about the market:

But, What Does This Mean in a Market That Trades ACTUAL Barrels?

The NYMEX is the first column in your price equation. If RBOB futures go higher, it will send gasoline prices up right through the fuel chain — unless the next link in the chain does something to counteract it.

Understand the fuel chain from start to finish with this helpful e-Book from OPIS.

Fuel is a must-have for end users like municipalities and school districts. However, procurement is not straightforward.

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It’s that time again! The mercury in the thermometer dropping… 

And fuel suppliers can get hot under the collar when temperatures turn cold at the wholesale rack.

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If you buy gasoline and diesel from a wholesale rack, keeping an eye on spot market prices may be your key to saving money on your fuel purchases. 

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