Refinery Inputs Remain Strong Amid High Demand, Low Inventories for Distillates

We are getting into the peak summer driving season and gasoline demand has been hitting all-time highs. You might think that inventories would be drawing down and that the U.S. would need to import more gasoline and gasoline blending components. But not so. U.S. refineries are cranking out the products. Gasoline stocks are up 10% from a year ago—15 million barrels (MMbbl) higher than the top of the five-year range—and last week gasoline inventories made a contra-seasonal move upward, increasing by 1.4 MMbbl.  Net exports for the first quarter were up almost five times the same period in 2015. But what does all this mean for refined product markets in general, and gasoline balances in particular? Today, we examine the state of U.S. petroleum product markets.

For the past several months, U.S. refineries have been producing more distillate than demand warrants, resulting in a glut of distillate fuels, especially ultra-low-sulfur diesel and jet fuel. The disconnect between supply and demand has been particularly stark in the Gulf Coast region, where just a couple of weeks ago distillate stocks sat 39% above their 10-year average after coming perilously close to tank tops in August. The culprit, of course, is COVID-19, or more specifically the effects of the pandemic on air travel and the broader economy. Demand for motor gasoline rebounded more quickly than demand for ULSD and jet fuel, and refineries churned out more gasoline to keep up, but that results in more distillate too. Now, finally, there are signs that distillate stocks may be easing back down. Today, we discuss the build-up in ULSD and jet fuel stockpiles, the ways they might revert to the norm, and the potential for storing distillate now and selling it at a higher price later.

Thanks to the shale revolution, U.S. refiners have spent the better part of the last two years achieving milestones in export volumes and run rates. The U.S. exported record volumes of gasoline and diesel last year. Much of that newfound international market share came at the expense of ailing refining complexes in Latin America, particularly in Mexico. That worked out great for U.S. refiners on the Gulf Coast, who could load up a tanker of fuel and have it delivered within a matter of days. Now the market on both sides of the border is shifting; the political landscape has changed in Mexico and gasoline demand growth in the U.S. is threatened by higher oil prices. Today, we lay out factors impacting exports and demand in the U.S. gasoline market.