Platts runs a conference every year called (unofficially) the "Bottom of the Barrel", which covers the very unglamorous world of residual and bunker fuel.
Resid is known as the bottom of the barrel because it is, in fact, the leftover thick, viscous sludge left over at the bottom of a refinery's distillation tower once the lighter fractions are boiled off.
It's also the bottom of the barrel in value, as it is too thick and polluting to be used in car or truck engines. It's main uses are for power plants, industrial boilers, large apartment complexes, and for the really highly polluting stuff, ship engines.
But for the last three weeks, in New York Harbor low sulfur fuel oil has been worth more than 87-octane unleaded gasoline. The world has turned upside down. The main reason is due to the weakness in gasoline demand, and prices, but also seasonal strength in low sulfur resid.
NYMEX RBOB is trading at a negative crack spread, but European refiners keep sending over more cargoes, as New York is the "least-worst" outlet. At the same time, low sulfur fuel oil crack spreads are strengthening due to falling crude prices and increased wintertime demand for heating and power generation.
How long will the barrel be topsy-turvy? Not long, according to refining sources, who say that the resid market is so small that a little bit of extra supply will send prices tumbling.
In theory, it makes more sense for some feedstocks used for gasoline production to be blended into the resid market, since fuel oil prices are stronger. But it's likely that only little bits and pieces will get blended in, rather than full cargoes.
So, barring an extremely cold winter, look for gasoline prices to shortly rise back above low sulfur fuel oil. But in this year of crazy price movements, nothing surprises.
Listen to a related podcast with Dave Marino.
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