SAN FRANCISCO (MarketWatch) -- Some environmentally-friendly tweaks to gasoline sold at the pump this year may make trading on the New York Mercantile Exchange even trickier than usual.
And the usual switch from the winter blend of gasoline to the specifications required for the hot summer months won't help any.
"Throughout the last decade, we've seen February fire sales on gasoline that represented the 'perishable' winter blends that had limited shelf life," said Tom Kloza, chief oil analyst at the Oil Price Information Service.
This year, all of the RFG (reformulated gasoline) contracts can be perceived to have limited shelf life, he said.
"The gasoline that is being traded now is akin to bananas that will go brown."
'The gasoline that is being traded now is akin to bananas that will go brown.'
— Tom Kloza, Oil Price Information Service
In May, the market must adhere to new requirements for cleaner-burning gasoline and completely phase out chemical compound MTBE, also known as methyl tertiary-butyl ether, according to Phil Flynn, a senior analyst at Alaron Trading in Chicago.
As a result of the MTBE phase out, the NYMEX unleaded-gasoline contract is "becoming less popular by the minute and open interest seems to be going away because you're basically trading a lame-duck contract," said Flynn. "Nobody wants the gasoline contract with MTBE in it."
MTBE has been used in U.S. gasoline since 1979 as an octane booster, and helps fulfill oxygenate requirements set by the 1990 Clean Air Act Amendments, according to the Environmental Protection Agency. But MTBE has found its way into ground water, threatening the environment.
Ethanol boost
In place of MTBE, ethanol is the most likely alternative oxygenate for reformulated gasoline and demand for it promises to grow significantly going forward.
See Commodities Corner on ethanol.
"The last time this happened was in the spring of 2004 when a number of areas in New England switched to an ethanol blend," said James Williams, an economist at WTRG Economics.
"The uncertainty associated with the ability of refiners to meet demand -- more than any actual shortage of supply -- pushed refining margins on gasoline to historic highs," he said, and "there could be a repeat of that."
The problems with switching to ethanol from MTBE are manifold, he said.
Refineries must be modified to produce the correct blending components and terminals must add separate storage for ethanol since ethanol must be transported and stored separately from gasoline and only blended just before delivery, he said.
So, in many cases, terminals may also need blending equipment. Then there's required permitting, space and capital expenditures, Williams said.
"Ethanol production capacity is not sufficient to supply the additional demand and will have to be supplemented with imports," he said. And domestic ethanol will have to be shipped by rail to the East Coast, putting a strain on the rail system.
"With all the things that can possibly go wrong, it is likely that gasoline margins will increase despite the current high levels of inventories," he said.
Killing a futures contract
The complete phase-out of MTBE in gasoline will also lead to the conclusion of trading for a more than two-decade old futures contract.
The New York exchange plans to terminate the New York Harbor gasoline futures contract at the end of the year, according to Anu Ahluwalia, a spokeswoman at NYMEX.
That contract has been trading since December of 1984, she said. An alternative contract was introduced in October of last year.
New York Harbor reformulated gasoline blendstock for oxygenate blending, or RBOB, features physical delivery in the New York Harbor area for blending with 10% denatured-fuel ethanol.
It's "like your basic gasoline -- before you put in the additives," explained Flynn.
The purpose of the RBOB futures contract is to "replace" the unleaded-gasoline contract, he said, adding that they're "trading side by side right now."
The last New York Harbor gasoline futures contract month to be traded is January 2007, said Ahluwalia, and delivery for that contract would be in late December of this year.
Both gasoline futures contracts currently trade on the trading floor and NYMEX expects the transition to the RBOB contract from the old gasoline contract to be "smooth" with the "same players in the ring," she said.