Wholesale Costs in Greater Chicago Market Up on RVP Change

By Brian L. Milne, Energy Editor, Schneider Electric

The recent transition in gasoline specifications to lower summer-grade emission standards in the Chicago spot market pushed up wholesale costs at terminals in the upper Midwest that will drive retail prices higher in the coming days. Overall, wholesale costs in major metropolitan markets were mixed—higher in the Rocky Mountains and east while mostly lower along the West Coast.

New pipeline cycle timing late last week introduced gasoline with 9.0 psi Reid vapor pressure (RVP) rating for the Chicago spot market, pushing cash differentials sharply higher, and gasoline spot prices to three week highs. In futures, the April Reformulated Blendstock for Oxygenate Blending contract trading on the New York Mercantile Exchange is mostly holding in a $3.10 to $3.20 gallon range.

View Schneider Electric’s Weekly and Historical Fuel Price Index.

Concern over sluggish economic expansion globally has limited expectations for oil demand growth, with forecasts projecting year-on-year increases to come from emerging economies. Indeed, the Organization of the Petroleum Exporting Countries in their recently released Monthly Oil Market Report for March expects half of the 800,000 bpd increase in global oil demand they see for this year to come from China.

Concerns over the euro zone economy has limited the anticipated growth in oil demand, while a weekend action taken by the government of Cyprus in an effort to secure bailout funding from the European Central Bank and other stakeholders reignited worry for the single euro economy. Cyprus imposed a one-time levy on bank deposits to limit the size of the needed bailout, angering its citizens. This action has prompted worry that a levy on bank deposits could occur elsewhere in the euro zone and what backlash it could draw.

In the U.S., industrial production in February increased to its highest output rate since March 2008, while the national unemployment rate fell to its lowest reading, 7.7%, since December 2008 also in February. These are supportive signs for economic growth in the U.S. that should bolster gasoline demand. However, consumer confidence slid in March following January’s 2% tax hike on payrolls and as the sequester hits. For housing, the market that sparked the Great Recession, builder confidence also slipped in March, continuing a trend seen since the start of the year following eight months of strong growth. Experts note however, constraints in the supply chain following the industry’s consolidation in response to the economic downturn and higher costs are primary reasons for the more dour sentiment.

On March 11, the Energy Information Administration (EIA) reported the average price for all formulations of regular grade gasoline fell nearly a nickel to $3.710 gallon, a one-month low. The average is 11.9 cents lower than the comparable year-ago price point.

The EIA expects lower crude prices to limit the upside in the retail average, according to their Short-term Energy Outlook released March 12, expecting the average to hold near $3.67 gallon over the next few months. EIA, in using futures and options pricing and implied volatility, offered a 16% probability that the U.S. retail gasoline average would exceed $4.00 gallon in June.

About the Author
Brian L. Milne is the Energy Editor for Schneider Electric—a leading business-to-business provider of real-time commodity information services among many other activities. Milne has been focused on the energy industry for 17 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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