PTQ Q4 2023 Issue

Big changes in the US octane market

Strategies for enabling higher margin capture in today’s highly volatile crude and product markets

George Hoekstra Hoekstra Trading LLC

T hree big changes in the US octane market are traceable to the Tier 3 10 ppm gasoline sulphur specification, including the first change: octane destruction in gasoline desulphurisers is five times higher; second change: The US retail octane value is five times higher; third change: The sulphur credit price is seven times higher. First change Octane destruction in gasoline desulphurisers is meas - ured by the change in RON octane vs product sulphur measured in field tests on commercial gasoline desul - phurisers, as shown in Figure 1 ‘performance curves’. The lower solid curve shows a loss of 9 RON octane at 10 ppm product sulphur, which was measured in a field test on a commercial unit. 1 The upper dashed curve shows a loss of 1.5 RON octane at 10 ppm product sulphur, which was the industry consensus expectation for octane loss when making 10 ppm product sulphur.2 The difference in the slopes of the two curves between 70 and 10 ppm sulphur is a measure of the higher-than-expected cost of compliance being realised by that refinery, compared to the industry consensus expectation, for reducing gasoline sulphur for Tier 3. Second change The retail value of octane is measured by the US average retail pump price differential between premium and regular gasoline in cents per gallon. Figure 2 shows it has increased from the historic value below 20 cents per gallon to the cur - rent level of 85 cents per gallon.³ The uptrend has persisted since 2012. Though often blamed on other factors, Tier 3 is unquestionably a primary cause of the increased market price of octane. Third change The price of Tier 3 sulphur credits is measured by the price of actual trades among gasoline suppliers. Figure 3 shows this price increased seven-fold since the first quarter of 2022, from $360 to $2,800/million ppm-gallons. This credit price is a direct measure of the true cost of meeting the Tier 3 gasoline sulphur specification. These three metrics combine to show the high cost being borne by US refiners to reduce gasoline sulphur from the previous (Tier 2) 30 ppm level to the current (Tier 3) 10 ppm level.

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-2.0

-4.0

-6.0

Industry concensus Field test actual

-8.0

-10.0

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120

Product sulphur (ppm)

Figure 1 This performance curve from a commercial field test shows high octane loss vs industry consensus expectation

$1.00

Premium- regular dierential

$0.85

$0.80

$0.60

$0.40

$0.20

Cost of Tier 3 compliance The current cost of Tier 3 compliance can be estimated directly from the sulphur credit price, as can be demonstrated for the cost of a single refinery and the cost for the US. Cost for a single refinery Consider a single refinery producing 100,000 barrels per day of gasoline. Instead of making 10 ppm sulphur, that refinery has the option to continue making 30 ppm sulphur and off - set it by buying $86 million/year worth of credits as follows: Single refinery cost = (30-10) ppm x 100,000 barrels/day x 42 gallons/barrel x $2,800/10⁶ ppm-gallons x 365 days/ year = $86 million/year. Figure 2 The US retail octane value has climbed steadily since 2012

PTQ Q4 2023