Apr 15 2022
Low production, strong demand, and weak gasoline imports raised the question of whether gasoline prices will follow in diesel's record-setting footsteps this summer.
US Gulf Coast pipeline ULSD's premium over CBOB has grown considerably since the start of the year. Although ULSD averaged just an 18.93 cents/gal premium over USGC pipeline CBOB in January and a 20.40 cents/gal premium in February, in March that premium spiked to 48.23 cents/gal. So far in April, Gulf Coast ULSD has averaged a 61.86 cents/gal premium over pipeline CBOB.
With the spread between diesel and gasoline growing, refiners have been maximizing diesel runs. As gasoline production takes a backseat, however, it is just one of many market fundamentals pointing to an expensive summer.
In the US Atlantic Coast, a key import hub for the US, European supply-side fundamentals have pressured first-quarter imports of gasoline and related blendstocks to their lowest levels in at least seven years.
USAC production capacity has declined over recent years, following the closure of at least three refineries: Philadelphia's 335,000 b/d PES refinery in June 2019, the partial closure of PBF Paulsboro's 160,000 b/d refinery in New Jersey, and the idling of the 135,000 b/d Come-by-Chance refinery in eastern Canada, which was later acquired by Braya Renewable Fuels for conversion into a renewable fuel plant.
"While gasoline demand will be closer to pre-pandemic levels, the impacts of higher prices are expected to negatively impact gasoline demand this summer," Debnil Chowdhury, vice president of refining and marketing at S&P Global Commodity Insights, said.
US product supplied, or implied demand, of finished motor gasoline averaged around 8.6 million b/d in January-March, according to US Energy Information Administration data for rolling four-week averages. In the same period, demand averaged 8.1 million b/d in 2021, 8.8 million b/d in 2020, and 8.9 million b/d in 2019.
USAC crude runs declined 30% in the first quarter of 2022 compared with the same period in 2019 prior to the June 21, 2019 fire at Philadelphia Energy Solutions that led to the shutdown of the East Coast's largest and oldest refinery, according to S&P Global Commodity Insights analytics data.
The Organization for Economic Cooperation and Development, or OECD, Europe crude and feedstock run rates had also declined around 12% in the first quarter compared to 2017-2021 levels.
"Going into the summer, there is less VGO available in the western hemisphere because of the Russia-Ukraine conflict," Chowdhury said.
Vacuum gasoil, or VGO, is a vital feedstock for fluid-catalytic crackers to make gasoline and diesel. The US' reliance on Russian VGO has increased, as Caribbean refineries in Aruba and St. Croix closed. Much as diesel prices rose to meet hefty price spikes in natural gas used to power refineries, refiners need gasoline margins, or cracks, to improve to incentivize higher gasoline runs.
The US Gulf Coast feedstocks market has been notably thin in recent weeks as market participants find alternatives to Russian feedstocks. USGC feedstocks sources say they are expecting cargoes to arrive from the Middle East as the market replaces Russian feeds.
"Unless we see higher gasoline cracks, we won't see gasoline being produced," Chowdhury said. "Factor in that this will be the first post-pandemic summer, and demand is probably going to be higher than in 2021."
To mitigate high domestic fuel costs and low gasoline production rates, the US government announced the release of 210 million barrels of oil from the Strategic Petroleum Reserve, or SPR. The US committed to releasing 30 million barrels March 1 in response to supply tensions caused by the Russia-Ukraine war. US President Joe Biden announced the release of an additional 180 million barrels from the SPR over a six-month period on March 31.
Additionally, the US issued an emergency waiver April 12 to allow a blend of 15% ethanol in the summertime rather than the usual 10% maximum. Gasoline sources said the waiver is expected to have a minimal impact on the gasoline market.
"Think it's more bullish [for] ethanol as [I] thought ethanol has been fairly balanced," an Atlantic Coast market source said.
Atlantic Coast market sources said that summer grade supply of gasoline and naphtha is not problematic at the moment, although it is still too early to tell for summertime fundamentals.
"Feels like everyone has F1," a fourth market source said, referring to the 7.4 RVP RBOB.
While the impact on prices remains to be seen, fundamentals pointed to a tight summer unless something gives.
In their Summer Fuels Outlook released April 12, the EIA said that retail gasoline prices were expected to reach an eight-year high this summer.
"If this isn't settled, which it won't be, summer will be expensive," a fifth Atlantic Coast market source said. "Q2-Q3 will be an issue."