Falling production of motor gasoline, diesel and other refined products at Mexico’s aging refineries has created a south-of-the-border supply void that U.S. refiners and refined-products marketers and shippers are all too eager to fill. At the same time, the ongoing liberalization of Mexican energy markets is finally allowing players other than state-owned Petróleos Mexicános (Pemex) to become involved in motor-fuel distribution and retailing. The results of all this? U.S. exports of gasoline and diesel to Mexico are up 60% from two years ago, and U.S. companies are scrambling to develop or acquire the infrastructure needed to deliver refined products to Mexican consumers. Today, we begin a new series on the increasing role of U.S. companies in supplying, distributing and retailing motor fuels in Mexico, and on the new transportation and terminalling infrastructure being built to support that growth.
U.S. inventories of distillate — especially ultra-low-sulfur diesel (ULSD) and heating oil — are at their lowest pre-winter level in three years after falling during the summer months for the first time since inventory records started being measured in 1982. Rising diesel exports are one culprit; another is the shutdown of a number of Gulf Coast refineries during and immediately after Hurricane Harvey. The good news is that distillate prices have been increasing, as have the margins for refining crude oil into distillate — both encouraging refineries to ramp up their diesel/heating oil production. Today, we look at recent developments in the distillate market and what they may mean for diesel and heating oil prices this winter.
Over the past few years, rising production in the Canadian oil sands and U.S. shale plays such as the Bakken, Permian and Eagle Ford has given refiners new options for sourcing their crude, causing changes in oil pipeline utilization and prompting the development of new pipelines — or the reversal of existing pipes. A prime example of all this is playing out in Memphis, TN, where a Valero Energy refinery will be shifting from mostly U.S. Gulf Coast-sourced light crude to light crude that will flow in on the new Diamond Pipeline from the Cushing, OK, crude storage hub. Valero’s change in crude sourcing will be yet another blow to the 1.2-MMb/d Capline Pipeline, which for decades has moved crude north from the Gulf Coast to Patoka, IL, and other points along the way, including western Tennessee. Today, we look at the thinking and economics behind Valero’s plan and at the latest news on Capline.
California’s 12 remaining refineries don’t feel much love from their native state. The refinery fleet is particularly sophisticated — capable of refining mostly heavy and sour crude oil into the ultra-clean transportation fuels that state rules require. But state regulators seem to treat refiners like unwanted guests, to the point that rules have been put in place to actively encourage the shift from petroleum-based fuels to lower-carbon alternatives. The reward for refiners’ pain comes in the form of higher refining margins — particularly during unplanned outages. Today we weigh the rewards of higher gasoline and diesel prices today against a questionable future for refining in the Golden State tomorrow.
California refiners are under siege. State regulators seem to view crude oil refining as a nasty habit that needs to be broken. There’s an important catch, though: car-happy California is not only the nation’s largest consumer of gasoline — and second to Texas in diesel use — it allows only special, superclean blends to be sold within its boundaries. And California’s 12 remaining refineries need to meet tougher emission standards, too, making it difficult for them to expand their business or even modernize their plants. Today we discuss the irony that sophisticated refineries producing the cleanest fuels in the U.S. are faced with a shrinking market and no real hope of expansion.
Over the past five years, the price differential between regular and premium gasoline has been widening steadily. According to the Energy Information Administration (EIA), as of July 2017 the premium -vs.-regular differential reached $0.53/gallon — more than double the differential in 2012. This has produced cringe-worthy experiences at the pump for consumers requiring the premium grade and an incentive for refiners to optimize the gasoline pool. Consequently, refiners have been making operational adjustments and capital investments to squeeze additional high-octane components out of their feedstocks. Today we examine the premium-regular gasoline differential, provide a primer on gasoline blendstocks and octane levels, and discuss some contributing factors to the widening divide between the pump prices of 87- and 93-octane gasoline.
Worldwide, refiners expect to add significant capacity over the next five years, mostly in the Middle East and the Asia Pacific region. While only a small amount of crude processing capacity additions are expected in the U.S. and Canada, the capacity additions elsewhere could have major product-trade and utilization effects on U.S. refiners — especially in PADD 1 (East Coast). Today we analyze expected near-term refinery capacity additions, global demand projections, and potential effects in the U.S.
Refiners in the Midwest and in the Mid-Atlantic states have each experienced good times and bad, both before the Shale Era and more recently. Lately, though, fortune has been smiling on the owners of midwestern refineries, a number of which have been expanded and reconfigured to run cheaper heavy crude from western Canada — changes that have put them at a competitive advantage to East Coast refineries running more expensive light crudes. Now, a proposed refined products pipeline reversal in Pennsylvania would allow more motor fuels to flow east from Petroleum Administration for Defense District (PADD) 2 into markets traditionally dominated by PADD 1 refineries. Today we look at recent developments in Midwest and Mid-Atlantic refining, and at the consequential battle for turf that’s just starting to flare.
Faced with uncertain growth in demand for refined products in the U.S., at least five refiners with major U.S. operations — including majors Shell, BP and Chevron — joined the bidding at a recent auction offering access to Mexico's downstream distribution system. Energy market reforms now unraveling national oil company Petróleos Mexicanos’ domestic supply monopoly are providing this opportunity. Initial auction winner Tesoro gained storage and pipeline capacity in two states in northwestern Mexico it expects to supply from a Washington state refinery. The market reforms also extend to retail gasoline stations, and majors BP and ExxonMobil as well as Valero and international trader Glencore have recently announced plans to launch retail networks in Mexico. Today we review the access Tesoro won in the first logistics auction as well as the wider Mexican market opportunity for refiners with operations north of the border.
U.S. exports of diesel and other distillates averaged 1.2 million barrels/day (MMb/d) in 2016, more than eight times their 2005 level and up slightly from 2015, another in a series of record-busting years for distillate exports. So far, 2017 looks like another winner. This year, though, a lot more distillate is being shipped south from Gulf Coast marine terminals to nearby Central America and South America, and less is being floated across the Atlantic to Western Europe. Today we consider recent trends in U.S. distillate exports and the significance of the export market to U.S. refiners.
The five refineries in the U.S. Pacific Northwest (PNW) performed better in 2016 than rivals on the East Coast for two main reasons. First, the changing pattern of North American crude supply has worked to their advantage. Faced with the threat of dwindling mainstay crude supplies from Alaska, refiners in Washington State replaced 22% of their slate with North Dakota Bakken crude moved in by rail. They have also enjoyed advantaged access to discounted crude supplies from Western Canada. Second, PNW refiners face less competition for refined product customers than rivals on the East and Gulf coasts, meaning they have a captive market that often translates to higher margins. Today we review performance and prospects for PNW refineries.
Shipping companies now know that within three years all vessels involved in international trade will be required to use fuel with a sulfur content of 0.5% or less—an aggressive standard, considering that in most of the world today, ships are currently allowed to use heavy fuel oil (HFO) bunker fuel with up to 3.5% sulfur. This is a big deal. Ships now consume about half of the world’s residual-based heavy fuel oil, but starting in January 2020 they can’t—at least in HFO’s current form. How will the global fuels market react to a change that would theoretically eliminate roughly half the demand for residual fuels? How will ship owners comply with the rule? What are their options? Today we discuss the much-lower cap on sulfur in bunker fuels approved by the International Marine Organization, and what it means for shippers and refineries.
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.
Mexico’s consumption of motor fuels is rising, its production of gasoline and diesel continues to fall, and U.S. refineries and midstream companies are racing to fill the widening gap. The export volumes are impressive: deliveries of finished motor gasoline from the U.S. to Mexico averaged 328 Mb/d in the third quarter of 2016, up 41% from the same period last year, and exports of low-sulfur diesel were up 29% to 194 Mb/d. And there’s good reason to believe that U.S.-to-Mexico volumes will keep growing. Today we look at recent trends in gasoline and diesel production and consumption south of the border, and at ongoing efforts to enable more U.S.-sourced gasoline and diesel to reach key Mexican markets by rail and pipeline.
OPEC’s agreement at its November 30 meeting to cut crude oil output has sent prices soaring. Many U.S. producers already are anticipating brighter days, but before anyone pops the champagne it’s important to consider the deal’s potential vulnerabilities, and to factor in other market developments that reduce the agreement’s effect. Today we look at pre-deal maneuvering, the impact of those maneuvers on the level of supply, and the things that could still derail the move to market equilibrium.