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.