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.
Posts from Sandy Fielden
On January 1, 2020 the International Maritime Organization (IMO) implemented new fuel standards for oil-powered vessels, except those equipped with exhaust scrubbers to remove pollutants. In the absence of a scrubber, the IMO 2020 rule stipulates that ships' bunkers contain less than 0.5% sulfur. Using a scrubber allows the vessel to burn cheaper high-sulfur fuel. Last March, a shipowner’s estimated $2.5 million scrubber investment for a 2-MMbbl Very Large Crude Carrier (VLCC) would take just over three years to recover, based on average fuel prices during the first quarter of 2019. This year, barely a month after the new regulation came into force, the payback period has shortened dramatically, to less than a year, though the coronavirus’s effect on shipping demand and fuel prices, among other factors, could again put payout timing at risk. Today, we look at changing price spreads between high-sulfur and low-sulfur bunker and the scrubber payback economics that suggest a rosier outlook for vessel owners who invested in scrubber installations, at least for now.
As new crude oil pipeline capacity to the Gulf Coast comes online, a growing disconnect is developing between the surplus crude volumes available for export and the actual export capacity at coastal terminals, particularly projects that would accommodate the more economical and efficient Very Large Crude Carriers (VLCC). This is especially true in the Beaumont-Port Arthur, TX, area, where the relatively shallow depth of the Sabine Neches Waterway limits vessels to Aframax-class ships or partially loaded Suezmax tankers. If planned pipeline expansions into the BPA region over the next two years are completed, over 1 MMb/d of additional crude exports would need to leave BPA terminals to balance the market. Today, we look at current and future export capacity out of BPA.
Refined product supply in Petroleum Administration for Defense District (PADD) 1, which comprises Atlantic Coast states from New England to Florida, has been in trouble all year. Maintenance issues beset refineries during the first quarter, and then in June, the region's largest refinery, a 355-Mb/d plant owned by Philadelphia Energy Solutions (PES), was shuttered after a fire. The loss of the PES output would've been manageable if imports had taken up the slack. But although gasoline imports increased, distillate shipments have actually been lower than normal since June. As a result, the PADD 1 distillate market has been drawing an average 163 Mb/d from inventory since mid-August, according to weekly Energy Information Administration (EIA) reports, leaving stocks in the region at a 10-year low. That storage deficit versus previous years will increase when the weather turns colder and heating oil demand kicks into high gear. With stocks at historical lows and market prices not attracting new supplies, the shortage may well foreshadow price spikes this winter. A potential strike by unionized workers at the Phillips 66 Bayway refinery in northern New Jersey could make matters worse. Today, we look at what's behind the PADD 1 distillate shortfall.
Limetree Bay Refining’s plans to restart the former Hovensa plant in St. Croix, U.S. Virgin Islands, at the end of 2019 will add significant refining capacity to the North American stack, helping to offset the loss this year of the 335-Mb/d Philadelphia Energy Solutions plant in Pennsylvania. Limetree Bay is also poised to fill a void in Caribbean refining that’s been left by Venezuela’s economic collapse as well as the International Maritime Organization’s 2020 changes to the bunker fuel market. But the facility is not without its challenges, from high fuel costs and stiff competition from Gulf Coast refineries to tropical storms. Today, we conclude an analysis of the operation and potential markets for the refinery.
Limetree Bay Refining plans to restart a former Hovensa plant in St. Croix, U.S. Virgin Islands, at the end of 2019. The refinery’s initial processing capacity of 200 Mb/d represents a significant addition to the North American stack, helping to replace the loss this year of the 335-Mb/d Philadelphia Energy Solutions plant in Pennsylvania. If it opens on time before the year’s end, Limetree will be well-positioned to fill a void in Caribbean refining that’s been left by Venezuela’s collapse as well as the International Maritime Organization’s (IMO) 2020 changes to the bunker fuel market. The plant’s location in the middle of world trade routes conveys some advantage, but it must compete with U.S. Gulf Coast refineries to supply regional markets. While higher input costs compared to U.S. rivals will dampen margins, a tolling agreement with BP could insulate Limetree from market exposure. Today, in the first of a two-part blog series, we review the operations and potential product market for the refinery.
Independent refiner PBF Energy on June 11 announced its plan to acquire Shell Oil’s Martinez, CA, refinery for about $1 billion; the deal is expected to close by the end of 2019. The purchase will give PBF its sixth U.S. refinery and add 157 Mb/d to the company’s existing 865-Mb/d refining portfolio, pushing its total capacity past 1 MMb/d. Post-acquisition, PBF will retain overall fourth place in the U.S.
This blog is based on research from Morningstar Commodities. A copy of the original report is available here.
U.S. crude exports out of the Gulf Coast averaged more than 2.4 MMb/d in the first four months of 2019 — using infrastructure that is increasingly constrained by a lack of deepwater ports. U.S. crude is reaching destinations worldwide, with large volumes traveling long distances to Asia on gargantuan 2-MMbbl vessels — Very Large Crude Carriers (VLCCs) — loaded offshore by ship-to-ship transfer. Shipments to Europe are primarily on smaller Suezmax and Aframax vessels. Overall, the increased marine activity is testing the limits of existing infrastructure. Today, we analyze the past 16 months of crude export vessel movements and their impacts on Gulf Coast ports. (We’ll also be discussing this and other critical trends related to U.S. export markets live and in person tomorrow at xPortcon in Houston.)
Some shipowners plan to comply with the IMO 2020 deadlines for limiting sulfur in ship emissions by installing scrubber devices to clean the exhaust generated by burning less expensive high-sulfur bunker fuel. For many, this may work out to be more economical, at least in the interim, than using more costly IMO 2020-compliant fuel with sulfur content of no more than 0.5% or converting the vessel to run on an altogether different fuel such as liquefied natural gas. However, narrowing “sulfur spreads” this year have put that compliance strategy at risk by tripling the time it would take for shipowners to recoup their scrubber investments. Today, we continue an analysis of the changing economics of scrubber installation in the run-up to IMO 2020.
Last year, the impending implementation of International Maritime Organization’s rule mandating the use of lower-sulfur marine fuels starting January 1, 2020, widened the price spread between rule-compliant 0.5%-sulfur bunker and the 3.5%-sulfur marine fuel that has been a shipping industry mainstay. Traders’ thinking was that demand for high-sulfur bunker would evaporate in the run-up to IMO 2020, as the new rule is known. But since early January, the spread between low- and high-sulfur fuel at the Gulf Coast has narrowed from nearly $11/bbl to less than $2/bbl. The culprit is a shortage of heavy-sour crude caused by a number of factors. Today, we begin a two-part series on low-sulfur vs. high-sulfur fuel and crude values as IMO 2020 approaches.
In the past month, two integrated majors with strong footprints in the Permian Basin announced plans to increase their refining capacity along the Texas Gulf Coast. During the last week of January 2019, ExxonMobil announced a final investment decision to expand its Beaumont, TX, facility’s capacity by 250 Mb/d, making it the largest U.S. refinery, and then confirmed an investment with Plains All American and Lotus Midstream to build a 1-MMb/d pipeline to ship crude to its Beaumont and Baytown, TX, refineries. In the same week, Chevron announced its purchase of the 110-Mb/d Pasadena, TX, Houston Ship Channel refinery from Brazil’s national oil company, Petrobras. Both Exxon and Chevron boasted record Permian production in their fourth quarter 2018 earnings calls. Today, we review Chevron’s purchase and Exxon’s expansion in light of Permian production growth and the changing Gulf Coast refining market.
Record runs allowed U.S. refiners to continue a multiyear streak of strong margins in 2018 despite higher crude prices during the first three quarters and a weaker fourth quarter after product prices tanked along with crude in October. While rising crude prices threatened refinery margins, a high Brent premium over domestic benchmark West Texas Intermediate (WTI) kept feedstock prices for U.S. refiners lower than their international rivals. The availability of discounted Canadian crude also helped produce stellar returns for Midwest, Rockies and Gulf Coast refiners that are configured to process heavy crude. Product prices only weakened in the fourth quarter when gasoline inventories began to rise. Today, we highlight major trends in the U.S. refining sector during 2018 and look forward to 2019.
Any joint venture has its pros and cons for each party, and in an ideal world, everyone involved in a JV sees net benefits from pairing up with a partner. A quarter-century ago, state-owned Petróleos Mexicanos (Pemex) purchased a 50% stake in Shell’s Deer Park, TX, refinery. The JV partners also entered into a 30-year processing agreement under which each would purchase half of the refinery’s crude feedstock and own half the output. Separately, Pemex agreed to supply as much as 200 Mb/d of Mexico’s heavy sour Maya crude to Deer Park and Shell agreed to supply Pemex with 35-40 Mb/d of gasoline to help meet Mexico’s refined products deficit. The partners recently agreed to an early extension of the deal by 10 years from 2023 to 2033, while reducing the supply of Maya crude after 2023 to 70 Mb/d, to be sold at a fixed price. Today, we continue an analysis of the JV and the new changes to it.
Twenty-five years ago, in 1993, the Mexican national oil company — Petróleos Mexicanos, or Pemex — purchased a 50% stake in Shell’s Deer Park, TX, refinery. The joint-venture partners entered into a 30-year processing agreement under which each would purchase half of the refinery’s crude feedstock and own half the output. Separately, Pemex agreed to supply as much as 200 Mb/d of Mexico’s heavy sour Maya crude to Deer Park and Shell agreed to supply Pemex with 35-40 Mb/d of gasoline to help meet Mexico’s refined products deficit. The partners recently agreed to an early extension of the deal by 10 years from 2023 to 2033, while reducing the supply of Maya crude after 2023 to 70 Mb/d, to be sold at a fixed price. Today, we begin a two-part series on the joint venture with a look at how Pemex has benefitted.
The Caribbean is strategically located at the crossroads of international trade routes between the Northern and Southern hemispheres, as well as the Atlantic and Pacific oceans. It has traditionally attracted oil trading, blending, and refining activity to meet the needs of local and international markets. Lately, the meltdown of Venezuelan national oil company Petróleos de Venezuela SA (PDVSA) — previously a dominant player in the region — has left refineries and storage terminals underutilized and starved of investment. U.S. Gulf Coast refineries have partially filled the gap by increasing product exports to the region, but an opportunity now exists for private investment to fill the refining and storage void left by PDVSA, and also to meet new demand for low-sulfur bunker fuel arising from stricter International Maritime Organization shipping regulations, which will come into effect in January 2020. Today, we review the impact of the PDVSA meltdown and new investment projects being pursued.