Houston (Platts)--15Nov2012/203 pm EST/1903 GMT

The US Gulf Coast CBOB discount to conventional gasoline on Colonial Pipeline has averaged 30 points year to date, 50 points higher than 2011, Platts data show.

CBOB is a suboctane blendstock that is sold as is at the wholesale level and then splash blended with ethanol at tank farms and then supplied to retail outlets, while conventional finished gasoline is ready-to-use gasoline produced at the refinery.

In theory, CBOB should typically carry a nominal discount to conventional in order to compensate for the reduced octane, but sometimes differences in pressure can cause this relationship to deviate from its established pattern.

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According to Platts data, CBOB was assessed higher than conventional three times so far this year: April 4, August 31 and September 4. Only on April 4 did CBOB climb above conventional, assessed 35 points higher, as a result of supply issues, but on two consecutive trading days, August 31 and September 4, CBOB was assessed 2.5 cents and 5 cents higher, respectively.

The spike in CBOB's relative value to conventional on those dates is explained by a difference in RVP for both grades, as CBOB was assessed with a 7.8 RVP and a 9.0 RVP for conventional.

Normally, both grades are measured with the same RVP in order to minimize any spec-related differences that could skew prices disproportionately.

In 2011, there were 19 trading days when CBOB held a premium to conventional, but none of the premiums were attributed to physical factors such as RVP, instead resulting from supply-and-demand issues. For those 19 days, the CBOB premium averaged 2.65 cents/gal.

According to the latest Energy Information Administration figures, production of CBOB has gradually risen over the last few years, just as conventional production wanes and ethanol becomes a permanent part of the overall US gasoline pool.

The latest EIA and industry estimates show that ethanol blends have already hit their maximum 10% volumetric blend wall in gasoline, and CBOB and ethanol together now form more than 97% of gasoline supplied to the US.

With further changes such as a bump in the federal ethanol blending mandate to a maximum 15% slated to trickle through the supply chain, it can reasonably be expected that the CBOB market will continue to grow at the expense of conventional gasoline, and the price relationship might well have some volatility in store as the market re-aligns with changes in demand.

Some observers in the industry point to the shrinking CBOB discount as a sign that the industry is gradually adapting CBOB as a replacement benchmark for the region.

--Subhan Usmani, subhan_usmani@platts.com
--Edited by Jason Lindquist, jason_lindquist@platts.com

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