U.S. Markets closed

As pump prices drop, U.S. motorists splurge on premium gas

By Jarrett Renshaw

NEW YORK, July 23 (Reuters) - U.S. motorists' habit of filling up with costlier "premium" gasoline when pump prices drop is delivering extra profits to refiners, such as Royal Dutch Shell and traders like Noble Group.

For the second time in the past decade, a sharp fall in pump prices has triggered a spike in demand for the higher-octane fuel that has far outpaced the overall rise in consumption.

In the first four months of the year, sales of premium grade gasoline - which makes up around a tenth of the market - surged by 12.6 percent, according to the latest data available from the U.S. Energy Information Administration. Regular grade sales rose by only around 3.7 percent during the period.

The extra demand combined with a supply squeeze in California, where cleaner fuel that uses similar additives as high-octane gas is the norm, has widened the price difference between regular and premium fuels and sent the price of specialized components used to make premium gas soaring.

"Premium can be very lucrative for refiners when the spread between regular and premium are high," Neil Earnest, an energy expert with energy consultants Muse Stancil, said.

By mid-July, premium gasoline was selling at 38 cents more than regular grades, EIA figures show, compared with just under 32 percent last year. Premium gas was still 40 percent cheaper than regular gas a year ago. (graphic: http://reut.rs/1Oc0BWt)

Companies that make or import niche fuels, such as alkylate and reformate that are blended with ordinary gasoline to increase its octane rating, are reaping additional returns even if some experts question whether premium fuel offers any considerable benefits for most motorists.

NO KNOCKS

What distinguishes premium fuel from other grades is its increased ability - expressed in octanes - to resist premature detonation, or knocking, as it is compressed in the engine before ignition.

Premium gas is used in high-compression engines so it is often associated with high performance sports or luxury cars. For most cars whose makers recommend regular fuel, however, higher octane readings provide no advantage, according to Jake Fisher, director of auto testing at Edmunds.com.

That debate aside, there is little doubt that consumers use more premium fuel when overall prices fall and less when gasoline prices go up, says John Galante, an analyst with Energy Security Analysis Inc.

In a 2013 Brown University study analyzing two decades of fuel sales data, researchers found that a $1 rise in pump prices increased the likelihood that a motorist would shift down to regular-grade fuel by 1.4 percentage points.

The reverse also held true, with households switching to costlier higher-octane gasoline when prices were falling.


WINNERS

Refiners with the largest catalytic reforming capacity - a process that helps boost octane in fuels - are best placed to take advantage of the trend.

ExxonMobil's Beaumont, Texas refinery has a catalytic reforming capacity of 142,000 barrels-per-day, the largest in the United States, while Philadelphia Energy Solutions' 77,400 bpd capacity is the largest on the fuel-hungry East Coast, EIA data shows.

Winners also include Reliance Industries, the Indian refiner that accounted for more than a third of all alkylate imports over the past 12 months, according to a Reuters analysis of the PIERS trade data. Noble Group is the largest importer among trading companies, the data show.

Demand for blending components is also buoyed by fuel suppliers in California where cleaner fuel required by the state's tough environmental standards has been in short supply in part because a major ExxonMobil refinery has been shut for months after a fire.

Seasonal factors are also at play. U.S. rules require a lower vapor pressure for gasoline supplies in the summer, something that can be accomplished in part by blending in components like reformate.

The U.S. shale oil drilling boom is also bolstering demand for such components by producing a bounty of secondary liquids including natural gasoline that must be blended with octane boosting components to create motor fuel.

Shell and other producers are marketing premium gasoline as a fuel that helps keep the engine clean, allowing it to run longer and better. Shell says carmakers recommend or require premium gas for about 40 percent of vehicles and expects that share to keep rising.

"People want a good product in their cars, which are significant investments," says Elen Phillips, Shell's vice president of North American fuel sales and marketing.

The Anglo-Dutch energy giant says it has a 17 percent share of the premium U.S. gasoline market, the largest of any major oil company.

"We've seen premium demand grow, and we think it's going to continue to grow." (Reporting By Jarrett Renshaw; Editing by Tomasz Janowski)