Magellan Midstream Partners said that it expects the lucrative butane blending in gasoline business seen in 2013 to be extended to 2014, but that profitable blending margin is to decrease in 2015-2016 based on the forward gasoline and butane price curves.
“Over the long term, we recognize (butane blending) margins are very attractive. They were very attractive in 2013. They’re going to remain very attractive in 2014. We don’t expect that to last forever,” John Chandler, chief financial officer at Magellan, said during the company’s earnings call on Wednesday.
“We are looking at the forward curve for gasoline and butane. And it would suggest gasoline prices do come down over time. So yes, we are expecting a, lower margin from butane blending in ’15 and ’16,” he added.
OPIS reported on Oct. 22 that butane injection for U.S. gasoline blending has become a lucrative business opportunity for some players, including investment banks and pipeline companies, thanks to comparatively cheap butane values to gasoline and refiners’ giveaways on RVP specifications.
On Thursday, butane blending economics for winter gasoline have improved significantly to $1.11/gal from about 60cts/gal seen last October. This is even though butane prices have risen amid higher demand. The higher-RVP winter specifications allow more butane blending in gasoline.
Last summer, butane blending economics for gasoline was at about $1/gal because of significantly cheaper butane prices. This was despite the stricter RVP specifications for summer gasoline.
The opportunity to blend butane is supported by refiners blending gasoline beyond the required RVP specifications as a precaution. This allows blenders to inject butane to blend gasoline to the maximum RVP allowed.
Blenders, including Magellan, will take ownership of the extra gasoline volume resulted from the butane injection in the pipelines, and they would be required to buy RINs for the blended gasoline. The butane injection profits will more than cover the RINs purchase.
To capitalize on butane injection, blenders would find out the exact RVP specifications of the gasoline barrels they pull from the pipelines via analyzing samples.
Blenders will take the gasoline barrels offline, inject it with butane and put the maximum allowed RVP gasoline back into the pipelines for delivery to the various destinations.
Magellan said that it generated record profits from this butane blending activity during 2013 due to the wide price differential between butane and gasoline.
Based on its assumptions that butane prices will remain at historically low levels, Magellan expects its 2014 commodity-related profits to be very similar to 2013 levels.
“We have 80% of our projected spring blending volumes hedged, which works up about 40% of our total projected 2014 blending activities. The RIN pricing volatility from early 2013 has quieted down for now. And in fact, we have purchased all of the necessary RINs for our 2014 expected blending volumes,” Chandler said, adding that Magellan is not exposed to any RIN price volatility after that point.