Released on May 10, 2006
(Next Release on May 17, 2006)

What About “BOB”?
Not to be confused with the 1991 movie starring Bill Murray and Richard Dreyfuss, the “BOB” of most relevance to petroleum markets today is RBOB, an acronym for Reformulated Blendstock for Oxygenate Blending. First introduced in 1994 as an element of the reformulated gasoline (RFG) program, RBOB grew out of suppliers’ inability to ship ethanol, or gasoline containing ethanol, through pipelines. Now that nearly all RFG, which makes up about one-third of U.S. gasoline consumed, contains ethanol, the supply, demand, and prices of RBOB are a key to U.S. gasoline markets.

RBOB is essentially incomplete RFG, lacking only the addition of an oxygenate. (Although the oxygen content requirement for RFG ended on May 8, 2006, most refiners are expected to continue to find it most economical to include oxygenates in RFG because they also help boost octane and are clean-burning components.) Because of the need to have the finished formulation meet the performance standards for RFG after the oxygenate is added, separate RBOB formulations were developed for the addition of MTBE, 10% ethanol, and 5.7% ethanol, as well as summer and winter volatility grades. In addition, increased ethanol blending gave rise to further permutations of the “BOB” family, including CARBOB (RBOB meeting the standards of the California Air Resources Board, or CARB), PBOB (premium RBOB), and CBOB (for the blending of conventional gasoline containing ethanol).

In recent weeks, a major concern in U.S. gasoline markets has been the changeover from MTBE to ethanol in RFG sold in much of the Northeast and parts of Texas, the last remaining MTBE RFG markets. While issues regarding ethanol, including supply adequacy and the logistics of transportation, storage, and blending, have attracted more attention, the supply of RBOB is also being watched to determine if supplies are adequate. Tight specifications for RBOB, especially Reid Vapor Pressure (RVP) limitations, make it more difficult and costly to produce, and some refineries in the U.S. may find it difficult to produce as much RFG when ethanol is used as they formerly made when MTBE was used. While this doesn’t necessarily mean that RFG supply will be reduced, it does imply that there will be a change in the pattern of supply. The winter-summer transition and the continuing effects of last fall’s hurricanes on refinery operations have further exacerbated the situation. As this week’s data show, RBOB inventories are now increasing, but remain an area of concern with only weeks to go before the start of the peak driving season that runs from Memorial Day through Labor Day.

Those watching spot and futures prices must also keep “BOB” in mind. The New York Mercantile Exchange (NYMEX) introduced an RBOB contract, starting with the January 2006 contract month, to run alongside its existing RFG contract. Although physical deliveries of RFG have dwindled, and been replaced by RBOB, over the past several months, NYMEX traders have been reluctant to move from the RFG to the RBOB futures contract. However, since the January 2007 contract month will be the final RFG futures contract traded on NYMEX, it is assumed that over the next seven months, traders will migrate to the new contract. Gasoline transactions in the spot market, where traders buy and sell petroleum products for immediate or near-term elivery, are typically indexed against the corresponding NYMEX price, and are now reportedly split between the RFG and RBOB contracts.

For all of the attention to RFG, RBOB, and ethanol, however, it is important to remember that conventional gasoline still accounts for about two-thirds of the gasoline consumed in the United States. Thus, though some regions have experienced tight supplies this spring due to the transition from MTBE to ethanol in RFG, the impact on U.S. average gasoline prices has been limited. Much more of the year-to-year increase has been caused by higher crude oil prices and significant decreases in gasoline production due to a number of refineries deferring maintenance from last fall to this spring due to Hurricanes Katrina and Rita. Furthermore, the history of petroleum product specification changes, in the U.S. and other countries, shows that after an initial period of tight supplies and somewhat elevated prices, new supply patterns emerge, and markets adjust relatively quickly. RFG consumers in much of the Northeast and Texas, like those in the Midwest, California, New York and Connecticut before them, will likely see little change at the pump, as RBOB and ethanol supplies interact behind the scenes.

U.S. Average Retail Gasoline Prices Fall by One Cent
The U.S. average retail price for regular gasoline fell 1.0 cent last week to 290.9 cents per gallon as of May 8, which is 72.3 cents higher than last year. Prices fell for the first time in 6 weeks. Prices decreased everywhere but in the Rocky Mountains and the West Coast, the latter of which has seen prices increase 57 cents per gallon since the beginning of April. West Coast prices gained 10.9 cents to 324.0 cents per gallon, with prices in California increasing 13.0 cents to 333.2 cents per gallon. The East Coast saw a price decrease of 3.0 cents to reach 291.0 cents per gallon. Prices were also down in the Midwest and on the Gulf Coast, with both regions down over 4 cents to 278.3 cents per gallon and 281.4 cents per gallon, respectively.

Retail diesel fuel prices gained 0.1 cent to reach 289.7 cents per gallon as of May 8, which is 67.0 cents higher than last year. Prices were up 4.2 cents per gallon in the Rocky Mountains, to 305.4 cents per gallon, and on the West Coast, where they increased an average of 8.2 cents to reach 318.0 cents per gallon and remain the highest in the country. California prices were even higher, increasing 8.1 cents to 324.4 cents per gallon. East Coast prices were down 0.8 cent to 288.4 cents per gallon, while Midwest prices fell by 1.2 cents to 284.1 cents per gallon.

Weekly Propane Build Moderately Higher
Following several weeks of robust stockbuilds, U.S. propane inventories continued to move higher last week, but at a somewhat more moderate pace, with inventories reaching an estimated 35.6 million barrels as of May 5, 2006. Regionally, East Coast inventories remained unchanged for the third consecutive week at 3.3 million barrels. However, inventories in all of the other regions reported gains last week, with Midwest inventories rising by 0.8 million barrels; Gulf Coast inventories gaining 0.3 million barrels; while the combined Rocky Mountain/West Coast regions reported inventories higher by 0.1 million barrels during this same time. Propylene non-fuel use inventories fell by 0.1 million barrels last week to account for a smaller 7.6 percent share of total propane/propylene inventories, down from the prior week’s 8.1 percent share.

Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.