Each winter, New York spot prices for gasoline and diesel spike higher than spot prices in Chicago, opening a seasonal arbitrage opportunity for Midwest refineries and motor fuel marketers—if only they could move more product east from Petroleum Administration for Defense District (PADD) 2 to the East Coast’s PADD 1. Midstream companies have taken note, and have been adding eastbound refined product pipeline capacity in Ohio and Pennsylvania. So far the aim has been to move gasoline and diesel as far east as central Pennsylvania, but the longer-term goal seems to Philadelphia, which ironically is the center of East Coast refining. Today we look at the ongoing shift in market territories claimed and sought by gasoline and diesel refineries and marketers in PADDs 1 and 2.
The Shale Revolution, the collapse in crude oil prices, and other market developments over the past few years have reworked the relationships among the various regions of the U.S., not just regarding crude, natural gas and natural gas liquid (NGL) production and flows, but for motor gasoline, diesel and other refined products as well. As we said in Refined, Piped, Delivered—They’re Yours, the U.S. produces and consumes more refined petroleum products than any other nation on Earth. According to the latest numbers from U.S. Energy Information Administration (EIA), domestic production of finished motor gasoline (which includes ethanol) is just under 10 MMb/d (as of the first week of December 2016), while production of diesel and other low-sulfur diesel exceeds 4.5 MMb/d; production of kerosene-type jet fuel (the most widely used; also known as kero-jet or jet-kero) tops 1.7 MMb/d. In Move It On Over, we focused on the refined-products relationship between PADD 3 (the Gulf Coast), which has just over half of the nation’s refining capacity (~9.5 MMb/d), and PADD 1 (the 17 East Coast states, plus the District of Columbia), which is the U.S.’s largest transportation fuels consuming region (accounting for about one-third of total motor-fuel use). About one-fifth of the East Coast’s daily need is produced at refineries within PADD 1 (mostly near Philadelphia and in northern New Jersey) and the other four-fifths is piped or shipped in, most of it from refineries along the Gulf Coast—plus some imports.
Today we focus on the changing relationship between PADD 1 and the Midwest (PADD 2), which according to EIA has about three times the operable refinery capacity of the East Coast (~3.9 MMb/d vs. ~1.3 MMb/d) and which (like PADD 3 but unlike PADD 1) produces more transportation fuels than it consumes. Most of PADD 1’s refinery capacity is located in the Philadelphia area: Philadelphia Energy Solutions’ 335-Mb/d Philadelphia Refining Complex (see Beginning to See the Light), Delta Airline’s 190-Mb/d Monroe Energy refinery in Trainer (PA), and PBF Energy’s 182-Mb/d Delaware City (DE) and 160-Mb/d Paulsboro (NJ) refineries (see Fix You). The only other large-scale refinery in the region is Phillips 66’s 238-Mb/d Bayway refinery, located on New York Harbor in Linden, NJ. As we said a few weeks ago in Back to Red, before the Shale Revolution, East Coast refineries relied almost exclusively on international markets for crude feedstock and had little or no competitive advantage over their rivals in the North Atlantic market. After the Great Recession in 2008, as product demand declined, refining margins in PADD 1 suffered due to competition from lower cost overseas and Gulf Coast suppliers.
When U.S. shale oil production took off, the 1.3 MMb/d of East Coast refineries still in operation benefitted from crude-by-rail (CBR) access to Bakken/North Dakota supplies, which sold at per-bbl prices significantly lower than international crude. In the past few years, though, the price spread between West Texas Intermediate (WTI, on which Bakken prices are based) and Brent (the international benchmark) has essentially disappeared, eliminating the PADD 1 refineries’ advantage over their European (and other foreign) competitors and reducing refining margins.
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