Backwardation in the US Atlantic Coast physical gasoline market has widened heading into winter, which may become the new norm at the rate refineries in the region are closing, according to market sources.
During the peak summer demand months, the front of the underlying NYMEX RBOB futures curve is typically in backwardation, with prompt prices above forward prices. Heading into winter, the market typically flips into contango, with prompt prices trading at a discount to forward prices.
But the prompt front/second month spread was assessed by Platts at 6.42 cents/gal Monday, strengthening from 5.3 cents/gal October 3.
In 2010, RBOB was also backwardated from mid-October through December for the most part because of unplanned outages and prolonged maintenance at some refineries. But the backwardation was less severe, with the front/second month spread at 2.22 cents/gal on October 11, 2010. On October 12, 2009, the spread was in a 1.46 cents/gal contango.
Also less severe were the premiums paid in the spot market for prompt physical barrels. Spot New York barge RBOB was assessed by Platts at 10.50 cents/gal over the front-month NYMEX contract Monday, up from a 6 cents/gal premium on the same day in 2010 and a 1.15 cents/gal discount in 2009.
The current backwardation is the widest sources have seen for the start of the winter.
"I will say I've never seen such a steep [motor gasoline] backwardation in the winter months," said a mid-Atlantic source.
Sources cited tighter supplies following ConocoPhillips' decision two weeks ago to idle its 185,000 b/d Trainer, Pennsylvania, refinery. The company plans to permanently close the plant by mid-2012 unless a buyer is found.
The decision followed a similar plan made public by Sunoco in September to shut its two remaining Pennsylvania refineries by mid-2012 -- the 175,000 b/d Marcus Hook plant and the 330,000 b/d Philadelphia refinery.
The East Coast region has already lost three other US and Canadian refineries over the past three years -- Sunoco's 145,000 b/d Eagle Point, New Jersey, plant; Western Refining's 128,000 b/d Yorktown plant in Virginia; and Shell's 130,000 b/d Montreal refinery.
There has also been some planned and unplanned refinery maintenance, at Hovensa's St. Croix refinery in the US Virgin Islands, for instance, and Sunoco's Marcus Hook refinery.
Sources doubted Sunoco would go back on its plans to exit the refining business even if crude prices on the US Atlantic Coast weaken, which would improve margins.
"If they [Sunoco] also shut their two refineries, we may see backwardation in the winter," said a Houston-based cargo player. What's more, the backwardated structure can last throughout the winter, said a Northeast source.
Some sources were surprised that ConocoPhillips decided to idle its Trainer refinery so quickly. Most had expected the company to keep the plant in operation at least until July 2012.
Other sources noted the Trainer shutdown did not further reduce already low supplies in the region, since the loss was offset by the return of PBF Energy's 190,000 b/d Delaware City, Delaware refinery, which fully restored operations last week.
Low imports have also tightened the USAC gasoline market, sources said. The US Energy Information Administration reported that imports into the USAC the week ending September 30 stood at 397,000 b/d, the lowest figure registered for the region since data become available in May 2004.
