The unveiling of final renewable fuel requirements for US refiners ignited a rally in gasoline futures Tuesday, helping support the rest of the oil complex.
The front-month gasoline crack, basis ICE Brent, reached $13.61/b Tuesday, its highest since August 18, and up from $10.28/b Monday. It was trading around $12.60/b Tuesday afternoon.
NYMEX January RBOB settled 5.61 cents higher at $1.3630/gal. NYMEX January ULSD settled up 1.48 cents to $1.3690/gal.
Crude futures searched for direction Tuesday. NYMEX January crude settled 20 cents higher at $41.85/b. ICE January Brent settled down 17 cents at $44.44/b.
RBOB's surge Tuesday coincided with soaring renewable credit (RINs) prices after the US Environmental Protection Agency on Monday issued final rules for compliance with the Renewable Fuel Standard.
RINs are tradable credits used to demonstrate RFS compliance. Refiners with surplus RINs can trade them on the open market or bank them for use in the following compliance year.
D6 ethanol RINs for 2015 were trading around 71 cents on Tuesday morning, having eased from an intraday high of 90 cents. On Monday, prices increased 10 cents to be assessed at 51.75 cents.
Higher RINS prices were the main driver behind RBOB's move Tuesday, along with an expected pick-up in gasoline demand due to holiday travel, Frost & Sullivan consultant Carl Larry said.
EPA's mandate should not have a big impact on refiners because margins look strong enough to absorb the extra RINS cost, he said.
"When you put it all together this doesn't mean much in the long term. It's more of a pebble in the road than a rock."
The RFS rules issued Monday set the number of gallons of biofuels that must be blended with the US transportation fuel pool each year from 2014-16.
Rises in RINs prices have sparked RBOB rallies before, but the strength in RBOB was unlikely to last, Citi Futures and OTC Clearing analyst Tim Evans said in a note.
RBOB is the petroleum component of finished gasoline, and higher ethanol requirements could actually displace petroleum barrels, and even hurt gasoline demand, he said.
A major New York Harbor gasoline trader said the announced mandate came as a surprise, as his company expected the 2016 mandate to be set at a lower level.
For 2016, the RFS will require 18.11 billion gallons of biofuels, of which 3.61 billion gallons must be advanced biofuels, including 1.90 billion gallons of biodiesel and 230 million gallons of cellulosic biofuels.
Other analysts said RBOB's strength following the EPA announcement represented a sigh of relief because the final rules could have been even more aggressive.
The 2016 requirement pushes the share of ethanol in the US transportation pool above the E10 blend wall, but the potential for higher finished gasoline demand means the outlook might not be so bad for gasoline, a gasoline analyst said.
"It kind of depends on the demand figure," the analyst said. "They are not factoring in a big increase, so the ethanol blend situation is not as dire."
In fact, the US gasoline market could even tighten if refiners export more gasoline, while higher RINs prices should also block deliveries of some finished gasoline from abroad, he said.
US gasoline prices will have to move higher to attract imports when more supplies are needed during seasonal maintenance periods, the analyst said.
The final RFS rule marked a "win for biofuels but was not a slam dunk against oil companies" either, Price Futures Group analyst Phil Flynn said.
"The market can live with this," he said.
OPEC WATCH
Saudi Arabia's oil minister, Ali Naimi, arriving in Vienna Tuesday for key OPEC talks to be held Friday, refused to discuss the the state of the market.
Naimi was also unwilling to discuss the market share strategy that he persuaded OPEC to adopt a year ago, when oil prices were already declining under the weight of rising supply.
Some market observers view the prospects for a production cut as increasingly bleak, given that any such Saudi move would play into Iran and Iraq's ambitions to ratchet up production. Saudi Arabia's express commitment to its market share strategy must also be kept in mind.
"If Saudi Arabia truly wanted to make a difference to today's balances, it would need to cut 1-2 million b/d," Energy Aspects said in a weekly note.
"Fast forward a year from now and, if our expectations are accurate, stock draws will have begun. Under that circumstance, Saudi Arabia (or OPEC) would only have to reduce production by [500,000 b/d], or even less, to achieve a similar $30-40 upswing in prices."
KAZAKH, NORTH SEA EXPORTS SET TO RISE
In the physical market, large monthly loadings for key crudes previewed a wave of exports set to hit the market.
Scheduled exports of Kazakhstan's CPC Blend crude are set to rise 267,350 mt to 4.128 million mt (32.2 million barrels) in December, according to trading sources and a copy of the final loading program seen Tuesday by Platts.
The December schedule marks a record-high, surpassing November when average loadings topped 1 million b/d for the first time ever.
In the North Sea, loadings of Brent, Forties, Oseberg and Ekofisk are scheduled to average 1.01 million b/d in January, up 19,355 b/ from December, according to loading programs released Tuesday and previously announced changes to the December BFOE loadings programs.
