Record US gasoline stocks could lead to selloff before summer RVP

US gasoline stocks climbed 5.94 million barrels to an all-time high 254.4 million barrels last week, according to Energy Information Administration data released Wednesday, which will likely continue to exert downward pressure on physical gasoline prices ahead of the switch to summer specification gasoline.

Several benchmark physical gasoline prices already have set record lows largely on oversupply.

Chicago CBOB fell Tuesday to 66.72 cents/gal, its lowest price since Platts started the assessment in 2009, and Gulf Coast benchmark conventional gasoline (M4) dropped to 89.97 cents/gal, its lowest since December 2008.

There is a winter gasoline selloff every year that leads into the change to summer specs, which vary by region, but market players will soon have to decide how to deal with the inventory glut.

"What it means is that refiners in the distribution system will have to start turning over their stocks earlier," Lipow Oil Associates President Andy Lipow said. "It happens every year, it's just what is the inventory we're starting with, and what is the date we need to get rid of it?"

Inventories typically begin to decline by early February. The five-year average shows US gasoline stocks peaking the second week of February and then trending lower into the summer.

Midwest gasoline stocks are up 2.46 million barrels at 61.33 million barrels, the highest since 1995. The Gulf Coast stocks have already entered the pre-summer decline, down 2.67 million barrels over two straight weeks of decline to 83.6 million barrels.

The first spec changes this year for Gulf Coast and Midwest gasoline are at the end of February when, historically speaking, selloffs begin. Gasoline stocks on the Gulf Coast fell 3.09 million barrels between the last week in February and the last week in April last year, and dropped 3.38 million barrels during the same period of 2014, EIA data showed.

"As you get into the end of the winter season, people might try to liquidate their winter stocks by reducing the price," Lipow said.

But cutting prices could be particularly hazardous for producers as already-suppressed gasoline values have finally caught up to plunging crude, narrowing refiner margins. After spending all of 2015 averaging well above $10/b on the Bakken crude cracking spread, Midwestern refineries got an average of $1.32/b refined in the week that ended Friday, according to Platts data.

The Gulf Coast fared a little better, averaging $5.23/b for Light Louisiana Sweet crude during the same period, although that is still under the $9.82/b average for 2015.

Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.

INCENTIVE REMAINS TO KEEP PRODUCTION HIGH

There are reasons for refiners to keep the lights on, even if the payoff won't be immediate. NYMEX April RBOB was assessed at a 22.74 cents/gal premium to the March contract Tuesday, a sign that stronger demand -- and blending costs -- are on the horizon.

That futures price spread is so significant traders have been making moves with an eye toward the future, one Midwest broker said.

"A lot of guys and building up and waiting for the April contract, and they should," he said.

Furthermore, there is no reason refiners or blenders have to keep making winter-grade gasoline. With stocks so high and demand in the summer expected to be even stronger than in recent years because of low consumer prices, refiners can also start looking ahead.

"They can draw on inventories for any future demand needs," said Bentek Energy analyst Anthony Starkey. "They will start making some summer blends a bit earlier, and just store it until it's time to switch."

An example of that market shift and potential price drop played out on the West Coast through January.

The outright value for West Coast benchmark Los Angeles CARBOB fell 73.22 cents/gal from the start of 2016 to February 1, as demand for winter gasoline vanished ahead of the first change toward summer specs February 8. The price bottomed out January 15, when it was assessed at $1.1213/gal, its lowest value since December 2008.

But indications for month-ahead barrels January 15 showed a strong contango market,

with February CARBOB indicated at $1.3135/gal and March at $1.369/gal. "Nobody wants to trade with only two weeks of winter [specifications] left," one trader said in mid-January.

Gasoline stocks on the West Coast were at 30.32 million barrels the week ended January 15, then the highest mark since February 2015.

--Joshua Brown, joshua.brown1@platts.com
--Joshua Mann, joshua.mann@platts.com
--Edited by Valarie Jackson, valarie.jackson@platts.com

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