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Trader's Corner
This week’s Trader’s Corner is going to discuss how gasoline exports have helped push crude, refined fuels and propane prices higher this year.
Gulf Coast refineries are processing crude at record rates. For 11 weeks in a row, they have had throughput of more than 8 million barrels per day (bpd). Click the charts to enlarge them.
But even though domestic demand is not particularly strong (below average for all but two weeks this year) refined fuels inventories have been coming down, driving gasoline and distillate prices higher. When refinery throughput is high, demand is below normal, inventories are coming down and the focus immediately turns to import/export activity, there is quite a story there. Gasoline imports are off and exports are up. As you can guess, there is a direct correlation.
Last week only 322,000 bpd of gasoline were imported into the United States. That is the total of finished gasoline and blend stocks. Compare that to last year during the same week when 1.02 million bpd were imported. In 2012 and 2013, imports have been running considerably below normal. (Click on the chart above and look at the green line that represents the five-year average.)
Now for the export side: U.S. refiners are exporting gasoline to Latin America and even to West Africa. Before mid-2010 the Energy Information Administration (EIA) didn’t even track U.S. gasoline exports. The increased export activity has them tracking it now.
Last week, refiners exported 258,000 bpd of finished gasoline. Amazingly, that means the U.S., the world’s largest consumer of energy, had net imports of just 64,000 bpd of gasoline last week. Keep in mind that the implied demand for finished gasoline last week was 8.982 million bpd.
For even more perspective, consider that last week there were only 1.979 million bpd of total petroleum products – everything coming from crude, including gasoline and diesel – imported into the U.S., while 19.787 million bpd were consumed. That means 90 percent came from domestic production or inventories.
Gasoline exports are down from the 590,000 bpd during March. During March, Gulf Coast refinery throughput was running about 7.2 million bpd. That means slightly more than 8 percent of its production was being exported.
There are several factors supporting the export of gasoline and why we're importing less. One is that gasoline production exported reduces the amount of ethanol and biofuels that refiners must purchase – foreign buyers do not require 10 percent of gasoline be sourced from renewable fuels. Almost all gasoline sold in the U.S. must contain at least 10 percent ethanol or biofuel.
Under the Renewable Fuels Standard (RFS), every refiner gets a quota based on a set amount of renewable fuels the government wants used in a given year. The amount is increasing every year and is at 16.55 billion gallons in 2013.
The government then estimates the total fuel consumption and puts out a percentage of all fuel sales that must be from renewable fuels. The percentage this year is 9.63 percent. Because the quota is not flexible yet actual demand can be below estimates, as it is now, refiners can face a tough choice.
If the gasoline is sold in the domestic market, refiners must have a higher percentage of ethanol in their gasoline than they would like so the RFS quota is met. Or, they must buy Renewable Identification Numbers (RINs) in the open market to meet their quota under the RFS.
Every gallon of renewable fuel made gets a 38-digit RIN. The RIN follows the gallon of renewable fuel until it is blended. At that point, the RIN’s first digit changes from the number one to the number two. Any RIN with a number two is tradable.
RINs must be submitted to the government to prove refiners are meeting their requirements under the RFS. If they do not have the required RINs to meet their obligations under the quota system, they can buy them from those that have an excess. RINs are now even traded on the open market. At the beginning of the year, a RIN traded for 5 cents is around $1.50 today.
Some refiners are worried about adding too much ethanol to gasoline because they fear lawsuits from consumers. Older cars are not equipped to handle more than 10 percent ethanol. The increasing amount of ethanol that must be used along with refiners' reluctance to add too much ethanol has put a premium on ethanol-specific RINs.
As a result, refiners are finding they can receive a better netback by exporting their gasoline rather than selling it into the domestic market. Imports, such as domestic production sold in the U.S., are subject to renewable fuels standards. Therefore, there isn’t a lot of incentive to import gasoline for sale into the U.S. market. This is putting significant upward pressure on refined fuels and crude prices.
Refiners are likely to keep exporting as much as they can, importing as little as they can and using up inventories as necessary in the short-term in hopes the RFS might be changed. Overall, it becomes a very supportive price environment for U.S. gasoline and other refined fuels such as diesel that must meet the RFS.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at info@propanecost.com.
WEEK IN REVIEW
Worries about China’s economy finally halted crude’s uptrend and had a downtrend developing by the end of the week.
In addition to weaker crude, a less supportive EIA inventory report caused propane to end its month-long rally.
We think crude is vulnerable to more downside and will be bearish to start next week.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: More eager sellers helped push propane prices lower. Crude prices fell after data was released showing a decrease in U.S. existing home sales.
Tuesday: Worries about crude supplies and an announcement by the Chinese government that it would put plans in place to encourage domestic consumption in order to stabilize its economic growth helped crude recover part of Monday’s loss. Propane could not find enough buyers to follow crude higher.
Wednesday: Propane prices continued lower as EIA inventory data showed a near-average build, which was less supportive than recent reports that had inventory building at a below-average rate. Crude slipped as investors became more worried about the Chinese economy.
Thursday: Propane prices continued their retreat, even as crude posted a small gain. Crude remained in a downtrend despite the positive close.
Friday: Propane managed to fend off another drop in crude to remain near Thursday’s close, but Belvieu extended its losing streak to six straight sessions. Worries about crude demand destruction overshadowed supply disruptions and supply threats to keep the downtrend going for WTI crude. |
