Crude Cassandra

US exporting more gasoline

First it was International Monetary Fund Christine Lagarde. Now it's Fed Chairman Ben Bernanke! Come on you prophets of doom; let us enjoy the economic recovery. Ok, I know that high oil prices could be a challenge to the global economic recovery but let's face it many people have been feeling better about things. Well perhaps they had legitimate concerns that the market was getting too optimistic too soon. We saw Fed fund futures and bond yields start to rise encouraged by strong data and an ever increasing oil price. The two kill joys, Bernanke and Lagarde, want to send a message to the bond market that hey we are not out of the woods yet.

That point was made somewhat by today's Chinese manufacturing data. According to Dow Jones Market Watch China manufacturing activity fell sharply in March as the rate of booking new orders fell to a four-month low at factories, leading to weaker generation of jobs, according to an initial reading of findings in an HSBC survey released Thursday. The so-called "flash" manufacturing Purchasing Managers' Index for March printed at 48.1, down from a final reading of 49.6 in February, HSBC said. "Weakening domestic demand continued to weigh on growth, as indicated by a slowdown in new orders, which came in at a four-month low," said Hongbin Qu, chief economist for China at HSBC. "More worryingly, employment recorded a new low since March 2009, suggesting slowing manufacturing production was hindering enterprises' hiring desire." The data call for further easing steps from Beijing, Qu said. The flash PMI is based on 85% to 90% of the total responses during a given month, and is an early indicator of business conditions facing Chinese manufacturers.

Obviously this adds to china slowdown fears and talk of a hard landing will again ring throughout the rings. As fears that China demand for all things oil will slow might weigh on oil prices.

Still with Iran still hanging out there and China still building its reserve, the impact on oil imports might be muted. At the same time US demand may be showing and there are some signs that demand may be bottoming out.

The Energy Information Agency reported draws across the board. Imports into the Gulf coast may have been delayed by weather and the four-week average on gas demand at the lowest level since 2001 yet there seems to be some resilience on the demand side and with summer coming. While the Energy Information Administration data showed the United States was a net exporter of petroleum products (petroleum and other liquids, excluding crude oil) for the first time since at least 1949 they are saying that they do not believe that exports are the cause of higher gasoline prices.  The EIA says that really have saved the Gulf Coast refiners from the fate of East Coast refiner giving them an outlet for their production, which may have been reduced without this outlet.

The EIA said that in 2011, total gasoline exports only comprised 18% of total U.S. petroleum product exports. However, they have been a growing share of total petroleum product exports since 2007 when their share was just 10%. The United States exported more than 500,000 barrels per day (bbl/d) of gasoline in 2011; this level represents a 57% increase compared to 2010, and a 266% increase compared to 2007. These increasing gasoline exports have been a response both to weak domestic demand and coproduction of gasoline spurred by strong global demand for distillate fuels. The EIA says that while the United States has always been tied into the global petroleum product markets, but this export growth has transformed its position from a net petroleum product importer into a net petroleum product exporter in short order. In terms of gasoline, the United States remained a net importer for 2011 as a whole; however, on a monthly basis, it was a small net exporter by the end of the year. In addition to gasoline exports, the United States exported about 850,000 bbl/d of distillate fuel in 2011. With distillate crack spreads regularly exceeding those for gasoline in recent years, refiners have tried to maximize distillate production to capture this value. In doing so, they have also produced more gasoline. Thus, excess gasoline in Gulf Coast markets has been partly the result of refiners responding to distillate crack spreads.

Most of the U.S. exports for distillate and gasoline come from the Gulf Coast. Gulf Coast excess capacity has resulted from both declining demand (preliminary data for 2011 show gasoline consumption 550,000 bbl/d, or 6%, lower than 2007) and increasing capacity, such as the recent expansion at Marathon's Garyville refinery in Louisiana. In addition, Gulf Coast refineries have a competitive advantage in some world markets. The Gulf Coast refining complex as a whole is very sophisticated. Refiners there have invested significantly in bottoms upgrading capacity and can thus run relatively cheaper crude oils. Moreover, they use natural gas for their fuel, which at current prices is an advantage compared to refineries fueled by petroleum. Gulf Coast refineries also have good water access and a location that allows for a relatively short-haul voyage to the growing Latin American markets.

Gasoline statistics at the national level can mask substantial geographic market variations for this product. Historically, the U.S. market has relied extensively on gasoline imports for supply. This has been especially true on the East Coast which has been the destination of about 85% of total U.S. gasoline imports. U.S. suppliers on the East Coast see imports as an economic way to meet domestic market needs. East Coast markets can be supplied by imports from areas such as Europe, where a relative over-supply of gasoline means wholesale prices there tend to be low. This creates a fairly consistent incentive to pull gasoline from Europe to New York Harbor.

So why do Gulf Coast refineries export product rather than send more to the East Coast, especially the Northeast, which receives much gasoline import volumes? Both pipeline capacity and domestic waterborne shipping constraints currently discourage increased volumes from traveling from the Gulf Coast to the East Coast. As long as European and other gasoline supplies remain competitive, the East Coast will continue to draw on these supplies. Additionally, expanded Midwest refining capacity is backing out requirements to ship products from the Gulf Coast north to that area.

At the same time, demand for gasoline in Latin America has been growing. Mexico has always been a major market for U.S. gasoline exports, but the volumes sent south have grown in recent years. Consumption in Mexico has increased 5% (38,000 bbl/d) since 2007 and 25% (160,000 bbl/d) since 2004. Furthermore in 2010 and 2011, gasoline production from Mexican refineries declined. From 2000-2007, total U.S. gasoline exports averaged about 150,000 bbl/d and of that, Mexico made up about 110,000 bbl/d. Since 2007, exports have grown by 380,000 bbl/d, with 220,000 bbl/d of this growth going to Mexico, and an additional 130,000 bbl/d going to other countries in Central and South America, notably Brazil, Ecuador, Guatemala, and Panama.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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