US RBOB gasoline crack spreads to Brent have soared by an astounding $16/bbl in the past month. Now above $23/bbl, they stand at the highest level since May 2011 and are at new record highs on a seasonal basis.
Gasoline has been the strongest performer in the petroleum complex this year, leading crude oil prices higher. While Brent prices lost $1.20/bbl since the start of February, gasoline futures continued to edge higher.
Further, the strength in gasoline prices has not been limited to the front of the curve as the back-end has also been supported.
It's all about the East Coast
The Atlantic Basin gasoline market remains exceptionally tight following a range of supply shocks. Nationally, gasoline inventories failed to build at all this winter and in the East Coast PADD 1 they are at the low end of the 5-year range, 7% below last year.
Refinery closures, outages and a heavy maintenance period are hitting the market hard. Yet the gasoline shortage is largely confined to the East Coast.
Although the Gulf Coast has ample supplies, barrels cannot easily move up to the North East as pipeline transportation is limited primarily to the Colonial pipeline which is maxed out. Secondly, waterborne vessels that could carry Gulf Coast supplies to the East Coast are highly scarce due to the1920 Jones Act.
Thus, imports will be increasingly critical in plugging the hole to meet demand, and all eyes are currently on Europe. In a continuation of a theme established last year, European refiners are benefitting from elevated margins due to global tightness, outages and prolonged maintenance.
That is keeping many older and less sophisticated plants running for longer. In our view, the day of reckoning will not be prolonged for much longer.
BofAML (Bank of America Merrill Lynch) sees European refiners shut down 0.4 million b/d of capacity this year as they cannot compete with their counterparts in the United States who enjoy cheaper feedstock from domestic shale oil and cheaper power prices due to shale gas.
That in turn implies that US gasoline imports from Europe could remain low.
If gasoline demand continues to benefit from improved consumer confidence, the RBOB gasoline market could face further volatile price spikes this year even if near-term crack spreads are likely to cool off after maintenance.
Source: BofAML (Bank of America Merrill Lynch)