Higher gasoline imports to the U.S. East Coast and weaker demand in the region have combined to bloat gasoline inventories, raising the question, what would it take to bring the market into balance? East Coast refinery output is down from this time last summer in response to somewhat lower crack spreads, but not enough to make a dent. Part of the problem is that while gasoline demand turned anemic in the Maine-to-Florida region, it is even weaker in many overseas markets. Also, the skill of East Coast blenders in dealing with a wide variety of supplies has always made the region an attractive destination for international product flows. Today, we continue our look at petroleum product cargo flows, and what they are telling us about the health of the market.
In Part 1 of this series, we discussed the fact that while global demand for crude oil has been growing 3% to 4% annually, growth in oil refining –– turning crude into products –– has been on a steeper climb. It comes down to this: Refiners, tempted by cheap crude and healthy processing margins, have been turning out more product, and refiners, traders, marketers and others have been squirreling away those barrels. The long run of high refinery output now is coming back to haunt the industry, both in the U.S. and overseas. Our focus last time was on middle distillates (heating oil/diesel and jet fuel). We found that a combination of favorable refining margins, a relatively mild 2015-16 winter and other factors have left U.S. inventories of middle distillates at or near record highs so far in 2016. We also discussed the interconnectedness of international middle-distillates markets, the petroleum-products glut in Asia, and the challenges that U.S. East Coast and Gulf Coast refiners might face from overseas competitors if they were to pull back on production this fall. (Click here to request access to ClipperData’s full suite of proprietary crude oil and petroleum products data and reports).
This time, we focus on gasoline. U.S. inventories are at historically high levels for this time of year, the high-demand season for gasoline is about to end on Labor Day, and refiners have to consider how long to idle their plants during maintenance season. The U.S. East Coast is the main connection to the world gasoline market, and a bellwether for the health of refining in its own right. We will therefore dedicate a large part of this post to the outlook for that part of the country.
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About the song
“It’s a Small World (After All)” is a Disney song played at rides of the same name at all the Disney theme parks worldwide. Written soon after the Cuban Missile Crisis (of 1962) as a way to promote world peace and brotherhood, It’s a Small World (which was also played at the Unicef Pavilion at the 1964-65 World’s Fair in New York City) is considered to be one of the mostly frequently played songs of all time, and (sadly) one of the most difficult to get out of your head.
Comments
Hi Abudi,
Very informative article. You have covered various aspects related to the glut in gasoline market quite well.
One of the aspects which is mostly ignored by many people is the increase in gasoline yield in US. Going into the shoulder months, the gas / heat spread was actually pretty high such that refiners could have easily maintained their FCC thruputs at full loads by diverting SR gasoil along with VGO as feed while reducing their crude thruputs. This resulted in higher gasoline yield close to 61% (almost 3% higher). However, I believe going forward gasoline yields should revert back to the usual range of 56-58% and that should help in easing the glut. The same may not be true for middle distillates though where yields would go higher and should reflect in the price / market structure in the days to come.
Regards,
SSK