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Pricing accuracy in energy commodities is typically improved by factors such as liquidity and stable market conditions, and so any change to the latter increases the risks of mispricing. Such factors could be unpredictable events such as political unrest or the imposition of sanctions, one-off events such as IMO 2020 (implementation of a stricter marine fuel sulphur cap), or sharp moves in adjacent markets such as freight. But other such changes to market backdrops are widely-expected and planned-for: such as scheduled seasonal changes to quality specifications for fuels in particular countries or regions.
Why gasoline specifications change with the seasons
Gasoline quality specifications have historically varied significantly across countries and regions, reflecting everything from the variability in global refinery capacity and complexity, blending capabilities, and local cost sensitivities or pricing regimes. Given that a single batch of gasoline can comprise a mixture of blendstocks and components, adhering to a standard quality specification is important.
While standard national specifications do step-change, far more commonplace are regular switches between seasonal grades. Unlike jet fuel, which boasts a common global year-round quality specification (“A-1”), qualities for road fuels can vary throughout the year. In the case of gasoline, this is primarily due to the need to ensure fuel evaporability limits are set in line with regional summer temperatures in the relevant jurisdiction. Some of the hydrocarbons in gasoline have relatively low boiling points, which makes vapourisation easy in warmer weather. This in turn can contribute to fuel loss and air pollution. This has consequences for fuel blenders: butane is popular blending component for gasoline, but its high evaporability limits its ability to be blended into the gasoline pool in the summer months.
Seasonal grade switchovers and wholesale pricing
As a consequence, in Northwest Europe, local gasoline sales switch between summer-, winter- and intermediate seasonal grades over the course of the year, reflecting easing or tightening evaporability limits. The switch to summer grade takes place on 1 April each year, and to winter grade from 1 October onwards.
These regular switches in end-user product qualities have upstream effects when it comes to creating price benchmarks in the wholesale market. In the case of Eurobob gasoline in the ARA region, GX reflects gasoline with a maximum evaporability of 60kPa from 1 April onwards and 90kPa from 1 October onwards. In the days prior to the switchover, GX implements a transition period during which bids, offers and trades of both summer and winter seasonal grades are taken into account.
Ensuring transparency and confidence in benchmark pricing
Given the often large differences in the prices of summer and winter grades of gasoline – reflecting the different components utilised to blend them – the methodological process by which the two grades are included into daily calculations will have a significant impact on the final price assessment, hence requiring greater transparency.
GX offers traders, brokers and analysts market-leading transparency on its methodological process. Each index has an associated factsheet with a flowchart that offers a diagrammatic representation of the calculation logic utilised in different scenarios, including the seasonal transition periods. If a new market scenario were to present itself, any methodological decision taken is embedded into GX processes, to create consistency for the future.
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In the cases of Eurobob Oxy and Non-Oxy barges, GX includes both summer and winter grades in price calculations, so long as there is a demonstrable market. In the event of trade falling short of 3,000 MT, notional trades are calculated using the best bid/offer at 16:30, and included in the day’s calculation if insufficient real trades have taken place such that total volume is at least 3,000 MT. A single representative price is created for Eurobob Oxy barges, combining summer and winter grades, and the average traded or assessed differential to swap across the seasonal grades is compared to the Non-Oxy differential and applied to the outright Non-Oxy price in order to create a final outright Oxy price.
The transparency and consistency that GX has built into its European gasoline price calculations is an example of the approach we take across regions and commodity classes, giving traders and other end-users greater confidence in the robustness of GX data.
