By Jarrett Renshaw
NEW YORK, July 23 (Reuters) - U.S. motorists' habit offilling up with costlier "premium" gasoline when pump pricesdrop is delivering extra profits to refiners, such as RoyalDutch Shell and traders like Noble Group.
For the second time in the past decade, a sharp fall in pumpprices has triggered a spike in demand for the higher-octanefuel that has far outpaced the overall rise in consumption.
In the first four months of the year, sales of premium gradegasoline - which makes up around a tenth of the market - surgedby 12.6 percent, according to the latest data available from theU.S. Energy Information Administration. Regular grade sales roseby only around 3.7 percent during the period.
The extra demand combined with a supply squeeze inCalifornia, where cleaner fuel that uses similar additives ashigh-octane gas is the norm, has widened the price differencebetween regular and premium fuels and sent the price ofspecialized components used to make premium gas soaring.
"Premium can be very lucrative for refiners when the spreadbetween regular and premium are high," Neil Earnest, an energyexpert with energy consultants Muse Stancil, said.
By mid-July, premium gasoline was selling at 38 cents morethan regular grades, EIA figures show, compared with just under32 percent last year. Premium gas was still 40 percent cheaperthan regular gas a year ago. (graphic: http://reut.rs/1Oc0BWt)
Companies that make or import niche fuels, such as alkylateand reformate that are blended with ordinary gasoline toincrease its octane rating, are reaping additional returns evenif some experts question whether premium fuel offers anyconsiderable benefits for most motorists.
NO KNOCKS
What distinguishes premium fuel from other grades is itsincreased ability - expressed in octanes - to resist prematuredetonation, or knocking, as it is compressed in the enginebefore ignition.
Premium gas is used in high-compression engines so it isoften 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 JakeFisher, director of auto testing at Edmunds.com.
That debate aside, there is little doubt that consumers usemore premium fuel when overall prices fall and less whengasoline prices go up, says John Galante, an analyst with EnergySecurity Analysis Inc.
In a 2013 Brown University study analyzing two decades offuel sales data, researchers found that a $1 rise in pump pricesincreased the likelihood that a motorist would shift down toregular-grade fuel by 1.4 percentage points.
The reverse also held true, with households switching tocostlier higher-octane gasoline when prices were falling.
WINNERS
Refiners with the largest catalytic reforming capacity - aprocess that helps boost octane in fuels - are best placed totake advantage of the trend.
ExxonMobil's Beaumont, Texas refinery has acatalytic reforming capacity of 142,000 barrels-per-day, thelargest in the United States, while Philadelphia EnergySolutions' 77,400 bpd capacity is the largest on the fuel-hungryEast Coast, EIA data shows.
Winners also include Reliance Industries, theIndian refiner that accounted for more than a third of allalkylate imports over the past 12 months, according to a Reutersanalysis of the PIERS trade data. Noble Group is the largestimporter among trading companies, the data show.
Demand for blending components is also buoyed by fuelsuppliers in California where cleaner fuel required by thestate's tough environmental standards has been in short supplyin part because a major ExxonMobil refinery has been shut formonths after a fire.
Seasonal factors are also at play. U.S. rules require alower vapor pressure for gasoline supplies in the summer,something that can be accomplished in part by blending incomponents like reformate.
The U.S. shale oil drilling boom is also bolstering demandfor such components by producing a bounty of secondary liquidsincluding natural gasoline that must be blended with octaneboosting components to create motor fuel.
Shell and other producers are marketing premium gasoline asa fuel that helps keep the engine clean, allowing it to runlonger and better. Shell says carmakers recommend or requirepremium gas for about 40 percent of vehicles and expects thatshare to keep rising.
"People want a good product in their cars, which aresignificant investments," says Elen Phillips, Shell's vicepresident of North American fuel sales and marketing.
The Anglo-Dutch energy giant says it has a 17 percent shareof the premium U.S. gasoline market, the largest of any majoroil company.
"We've seen premium demand grow, and we think it's going tocontinue to grow." (Reporting By Jarrett Renshaw; Editing by Tomasz Janowski)
