The Distillation Column
A weekly blog by Robert Sharp looking at refinery market dynamics
About This Blog
This blog is about where the space between chemicals and refining economics intersect. It gives deeper insight into the US gasoline, blendstock and feedstock markets – and relates them to chemicals. Robert Sharp, the editor of PetroChem Wire's Daily Refinery Focus, is the author of this blog. He brings more than 35 years of experience covering the refined products markets. Robert can be reached at Robert@petrochemwire.com or (713) 828-2145.
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Pre-buying alkylate for summer blending an unworkable strategy amid weak octane, gasoline prices
HOUSTON, March 17, 2017 (PCW) -- Alkylate differentials flirted briefly with strength in March, but have headed lower again as gasoline looks weak and octane values have not gone higher.
Alkylate is a 5.5 RVP, 92-93 octane blendstock, prized for its value in blending up octane and lowering volatility (measured in RVP) in summer grades of gasoline; it trades in the US Gulf Coast as a differential to finished 87 octane conventional gasoline (commonly referred to by its Colonial Pipeline moniker, “M grade.”)
Historically, gasoline blenders will store alkylate in the winter months, buying it at low differentials versus gasoline, storing it for three to five months and hoping that the differential will rise in late March when alkylate is needed to make lower RVP (historically more expensive) summer grades of gasoline.
This is a strategy that no longer works.
Right now the Gulf Coast benchmark for M grade gasoline is 9 RVP, the summer grade, which will remain the benchmark until fall; winter grades in the South are 13.50 RVP.
In short, the 5.5 RVP alkylate should be near its most valuable annual levels right now. On Thursday, it was assessed by PetroChem Wire at gasoline plus 22 cpg, down from 29 cpg on March 13, which had been its highest of the year; on March 1 the differential was 27 cpg.
To put this in perspective, alkylate in 2015 routinely traded between 35 cpg and 55 cpg over gasoline, even up to 59 cpg. In 2016, however, it seemed stalled at lower differentials, from which it has never really recovered for any extended period.
Also, the underlying price of gasoline has fallen. On February 1, the assessed price of M grade gasoline was 159.10 cpg, by March 1, it was 152.30 cpg, and on Thursday, it fell to 149.67 cpg.
Weak Octane Value
Another factor in alkylate prices is the value of octane, which has also been weak for most of the year. On March 1, the 87-93 spread for conventional gasoline was 14.50 cpg. On Thursday, it was 11 cpg.
In the current refining environment, it is perhaps a question why a refiner would want to make spot alkylate at all. Alkylate is a by-product of fluid catalytic cracking using refinery grade propylene (RGP) as a feedstock, but the value of RGP is higher than alkylate by a long shot, and has been so for months.
These atypical price dynamics have also interestingly occurred during maintenance season, when crude runs are low and FCC maintenance has been high, which should have decreased alkylate production and provided some price support.
Naphtha differential narrows on tight benzene markets
HOUSTON, February 17, 2017 (PCW) -- US Gulf Coast naphtha differentials, especially heavy naphtha differentials, have narrowed in recent weeks as the market reacted to stronger benzene prices.
On January 3, PetroChem Wire assessed naphtha at 34 cpg under finished gasoline; by February 1 it had strengthened to 15 cpg under gasoline, although it fell to 19 cpg under gasoline as of Thursday.
Naphtha as assessed by PetroChem Wire is a 62 API “full range” barrel, with an Initial Boiling Point of 110F. Although heavy naphtha is not assessed, it is mentioned in the commentary, as a 58 API barrel with a 130F IBP.
Typically, heavier naphtha will produce more benzene when inputted into a catalytic reformer and then run through an aromatics extraction unit.
The spread between the two grades is typically 3 cpg in favor of the heavy naphtha, which has a better yield on a per gallon basis. The spread has now widened to 7 cents, or perhaps more.
Naphtha is inputted into a catalytic reformer, which yields reformate, a 100 octane, 1 RVP blendstock (assessed by PetroChem Wire as well); reformate can be blended into finished gasoline (if it has a low benzene content), but typically it is inputted into an aromatics extraction unit, which yields benzene, toluene and mixed xylenes, commonly referred to as “BTX.”
In the current market, it is the benzene that garners the most attention. Benzene began its rise in late November. A perfect storm of higher Asian and European prices have curtailed imports to the US, and lower crude inputs to Gulf Coast refiners have likely resulted in less naphtha production as well. Refiners have begun buying naphtha in the spot market rather than making their own from crude).
On November 1, benzene was assessed at $2.17/gal, but by December 1 it had risen to $2.45/gal; at the start of the New Year it was $2.70/gal and by January 24 it was $3.45/gal, its recent high.
It has fallen slightly since, to $3.34/gal on Thursday. Consider that on November 1 front-month WTI settled at $46.67/bbl, and on February 16 it settled at $53.20/bbl, an increase of $6.53/bbl.
In the same time period, benzene went from $2.17/gal to $3.34/gal, up $1.17/gal ($49.14/bbl).
The increased yield of benzene from a reformer would seem to justify the higher price of naphtha, especially heavier grades. In fact heavy naphtha has been sold for input directly into steam cracking as well, not reforming.
“Steam crackers want all the heavy they can get which is quite out of ordinary,” said one seller. -- Robert Sharp
Spot normal butane shows strength due to tight supply; could normalize in 2Q
Guest column by Samantha Hartke
HOUSTON, February 9, 2017 (PCW) -- Normal butane has seen tremendous strength in the last few months, rising 29 cpg or nearly 31%, since the beginning of the year to $1.23/gal. It's gained a whopping 58 cpg, or 89%, since mid-September, which is the start of the peak gasoline blending season.
This tremendous strength has resulted in outright spot butane hitting highs last seen in October 2014, according to PetroChem Wire prices, and exhibiting relative strength to crude not seen since 2009.
The reasons for this strength are manifold, but they ultimately paint an extremely tight supply-demand situation.
From a supply standpoint, butane production has been slowing slightly. The most recent EIA production (for November) shows butane production for the 2016 year-to-date at 108.378 million barrels, down from the record high set in 2015 of 111.838 million barrels.
This, however, could be a short-term phenomenon given the recent uptick in crude and spot butane prices, which should incentivize greater NGL recovery levels. Most analysts expect butane production to increase 5-13% through the end of the year and into 2018.
Butane inventory levels are what several market players are eyeing with great interest. November inventory data from the EIA showed stockpiles at 1.275 million barrels, a level not seen since Apr (1.165 million barrels). In contrast, year-ago levels were at 1.696 million barrels and the five-year average stands at 1.339 million barrels. Several analysts have forecasted inventories to hit lows last seen in 2011 by the end of the winter-grade gasoline blending season in May.
The reasons behind the low stockpile levels are largely due to intense gasoline blending demand and record exports.
Gasoline production last year hit all-time highs with a zenith of 10.537 million b/d in late December, according to EIA data. Average gasoline production in 2016 was 9.816 million b/d, up 2.5% from 2015 (which held the previous record). Butane demand for gasoline blending can soar from a low of around 60,000 b/d in the low RVP summer blend months to highs of more than 800,000 b/d during the winter blend months.
Butane exports hit a high water mark themselves last year, coming in at 36.073 million barrels (98,830 b/d), up 9.5% from the prior year. November exports came in at 4.566 million barrels (152,200 b/d), a level last seen in May and more than double the five-year average. The uptick in exports was largely seen as coming from Europe and the Mediterranean for petrochemical cracking because of a scarcity of the product in the Middle East and Europe.
Shipping sources noted petrochemical companies have been the dominant players of late in the export market, bidding quite aggressively for cargoes. Again, this is likely a short-term phenomenon. The price differential between USGC and Northwest Europe naphtha looks to be rapidly closing and should send European olefins producers back to cracking naphtha.
Some petrochemical players noted that is incremental cracking demand for butane domestically, even though natural gasoline and ethane are the most advantaged feedstocks. The reason: record-high prices for butadiene in the US and Asia, which is a co-product in the steam cracking process.
PetroChem Wire last assessed US spot butadiene at 111 cpp ($2247/mt). Asian prices, meanwhile, are around 141 cpp ($3100/mt) due to turnarounds in the region and Europe. With the arb wide open, crackers that can use butane as a feedstock are likely trying to maximize their butadiene yields. Currently, there are only a handful of crackers that maintain that kind of feedstock flexibility.
These include: BASF/Total Port Arthur; Chevron Phillips Cedar Bayou and Sweeny 33; Equistar Channelview; Flint Hills Port Arthur; Shell Norco OP-5, ExxonMobil Baton Rouge, among others.
PetroChem Wire’s forward curve assessments have consistently shown a steep backwardation between the front and next months, indicating again that butane strength should be short-lived. Currently, there is a 27 cpg discount between February and March, a relationship that has been narrowing since last week, as players deal with the short-term squeeze on the front month. The curve remains in backwardation through May as gasoline blending demand drops off and the summer blend takes hold.
US styrene hits high amid extreme domestic, global supply tightness
Guest column by Samantha Hartke
HOUSTON, February 2, 2017 (PCW) --- US spot styrene was assessed at $1480/mt (67.1 cpp) FOB USG on Wednesday, marking a high since PetroChem Wire began publishing styrene assessments in 2015.
This high-water mark is only overshadowed by the rapidity of its increase. Since the beginning of the year, spot styrene has gained $340/mt (15.4 cpp), or 29.8%, PetroChem Wire prices show.
The reason for the sharp uptick is supply tightness, both domestically and globally.
Americas Styrenics took down its 2.09 billion lbs/yr (950,000 mt/yr) styrene plant in St James, Louisiana, this month for what was initially planned as a month-long turnaround. Recently, the joint-venture 2.42 billion lbs/yr (1.1 million mt/yr) Cosmar plant in Carville, Louisiana, (joint venture by Total and SABIC) also went down for its planned turnaround. Last week, LyondellBasell’s 2.86 billion lbs/yr (1.3 million mt/yr) propylene oxide/styrene unit at Channelview went offline due to a power outage at the facility. All told, last week 7.34 billion lbs/yr (3.3 million mt/yr) --- or 61% --- of total North American styrene production capacity was offline for a brief time.
The LyondellBasell unit was reportedly restarted quickly.
This week, however, AmSty reported it would be extending its turnaround through mid-March because of equipment failure, and on Wednesday SABIC declared force majeure on styrene. In a customer notice, it stated that due to equipment failure it was now only expecting styrene production to resume in the middle of the year.
Additionally, this month, INEOS Styrolution’s 990 million lbs/yr (450,000 mt/yr) Texas City styrene plant is set to go down for planned maintenance for about six weeks, bringing nearly 46% of North American production capacity offline through the end of the first quarter.
As of Wednesday, March styrene was seen to be in backwardation, assessed at $1465/mt (66.5 cpp) FOB USG. But both February and March bids were seen at $1500/mt (68 cpp) on Thursday morning, suggesting the months are now at least in parity, although market players believe a contango structure will soon take hold.
Europe and Asia
Exacerbating the US supply situation are tight markets in both Europe and Asia.
According to customs data, Europe received absolutely no styrene imports from the US in December, a situation that could well repeat itself in January. Between low Rhine levels impeding vessel traffic, a recently remedied production issue at Shell’s Botlek aromatics complex in the Netherlands and an impending turnaround at Trinseo’s 1.1 billion lbs/yr (500,000 mt/yr) plant in the Netherlands, European styrene prices have also skyrocketd.
Meanwhile, Asia is staring at an extremely heavy turnaround period in 1Q with at least 3.19 billion lbs/yr (1.45 million mt/yr) offline, especially in Taiwan and Korea, which should result in low inventory levels carrying over into 2Q and possibly, 3Q.
PetroChem Wire assesses daily styrene spot prices and monitors global aromatics outages in its Daily Refinery Focus report. For a free trial, click here.
Spot PGP price spike creates uncertainty upstream and downstream
Guest column by Kathy Hall, David Barry and Samantha Hartke
HOUSTON, January 20, 2017 (PCW) -- Propylene has seen immense volatility since the beginning of the New Year with PGP gaining 12.25 cpp, or 36% of its value, while RGP picked up 9.5 cpp (46.3%).
Spot PGP has traded up to 46 cpp for January, and February has traded up to 48.75 cpp -- a level last seen in Feb 2015. Jan RGP activity has been thin but since trading at 23.75 cpp on Jan 10, it has been bid up to 30 cpp, while Feb RGP traded up to 36.5 cpp. The rapidity at which these spot prices have climbed is noteworthy with PGP seeing day-to-day jumps of as much as 5 cpp (Jan 5) and RGP at 6 cpp (Jan 13), something the market hasn’t seen since the rollercoaster crude days of 2011.
There are several reasons for this volatility.
Propylene, overall, moved into a tight supply situation. While prices in Dec did not necessarily reflect a tight market, end-year destocking has often masked supply situations. When demand resurfaced in Jan, buyers this year found that they had to pay dramatically higher prices.
Enterprise Product Partners, the US’ largest propylene merchant, has been having splitter issues since 3Q 2016, conducting sporadic maintenance during July, August, September and again in December. Enterprise has six splitters at Mont Belvieu with a combined capacity of 96,000 b/d. Dow Chemical's PDH unit at Freeport also experienced intermittant issues during 3Q, finally finding stable production in September.
While PDH and splitter production outages were in the spotlight, steam cracker outages quietly exacerbated the PGP supply situation. At some of the larger crackers with some heavy feedstock furnaces, which produce more propylene as a co-product than light crackers, the supply loss was palpable.
These outages included an extension of the expansion work at Equistar's Corpus Christi cracker, which lasted until mid-December, an unplanned production upset at Equistar's La Porte cracker for two weeks in December, an unplanned upset at Dow's LA-3 Plaquemine unit for two weeks in December, and planned outages starting in January 2017 at Formosa's Point Comfort Olefins 2 unit and Chevron Phillips' Sweeny 33 unit.
US propylene stocks, according to EIA data, were at 4.222 million bbls for the week ended Jan 13, marking the third consecutive inventory draw.
Polymer Orders Pull Back
Downstream, polypropylene suppliers had expected to ramp up production to meet strong domestic demand this month, but the run-up in propylene costs has caught PP buyers off guard and caused some to lower their order volumes.
Buyers appear unconvinced that the propylene increases will be sustained for more than a couple of months. Spot HoPP on an FOB Houston basis has moved from 40-41 cpp early this month to the upper 40s cpp or low 50s cpp as of today, effectively shutting the door for deep sea exports.
However, PP suppliers have backed out of the spot market amid uncertainty over how to price their product. There has also been more discussion of PP resin imports, as prices from offshore are becoming competitive in light of a potential double-digit PGP and PP contract increase.
Splitter Upsets Mute RGP Demand
Not only have such splitter outages tightened up PGP availability, they have muted demand for RGP. While the start-up of Enterprise's new 1.65 billion lbs/yr PDH unit at Mont Belvieu later this year will give PGP supply relief, RGP demand won't change as the unit's feedstock is propane.
However, a heavy refinery turnaround period in 1Q is expected to tighten RGP supply, making Feb RGP a hot commodity. As much as almost 600,000 b/d of production from fluid catalytic crackers and 200,000 b/d from cokers are estimated to be out during these turnarounds, according to IIR Energy estimates. Propylene from refineries is produced by FCCs and cokers.
Cash costs have also contributed to the increasing tightness in propylene supplies. While many steam crackers have replaced older, heavy-feedstock furnaces in the past 10 years, and expansions have been to add light-feedstock furnaces, many have kept the option to crack propane or E/P mix, phasing out gasoil and natural gasoline. This had a limiting effect on co-product production and reduced propylene production in general, but the use of metathesis units and the start-up and expansion of PDH units has made up for some of the co-product loss.
That said, ethane has enjoyed a sustained run as the cheapest ethylene feedstock in terms of its cash cost since mid-October, which has incentivized producers to favor ethane. Ethane, of all the feedstocks, results in the least amount of propylene as a co-product, again exacerbating an already snug supply situation for PGP.
Contract Price Speculation
The spot market volatility has intensified the speculation around monthly contract prices. While the spot prices are certainly an important market component, most PGP sales volume (and margin) is into the monthly contract market.
Despite a move by some in the contract market to move away from a negotiated price to a spot market average price, the monthly PGP contract price has a major effect on downstream PP markets and resin products. PGP contract prices in 2016 ranged from a low of 30 cpp in Feb to a high of 43 cpp in Sep, with the average for the year at 34.417 cpp.
PGP spot prices in 2016 ranged from a low of 26.875 cpp in Feb to a high of 42.75 cpp in Sep, with the average for the year at 32.469 cpp. When spot PGP was last in the upper 40s cpp range (Feb 2015), the monthly contract price was 50.5 cpp, and was continuing a slide down from mid-70s cpp reached the previous Oct. With the Dec 2016 PGP contract price at 31.5 cpp, the market is bracing for a dramatic increase, and then waiting to see how sustainable it is throughout the rest of the quarter.
Record exports push US gasoline prices atypically higher at end of year
HOUSTON, January 13, 2017 (PCW) -- Gasoline in the Gulf Coast has gone higher in recent weeks, assessed by PetroChem Wire at 148.45 cpg on December 1, and at 163.92 cpg on Thursday, an increase of about 15.5 cpg.
This flies in the face of common wisdom, which held that higher RVP used in winter grades would allow for increased use of lower cost butane, which would in turn keep gasoline cheap.
In the same period in 2015, gasoline in the Gulf Coast fell from 126 cpg, to about 101 cpg.
Also, demand in the winter months was expected to be lower, which should be a bearish influence. In fact, per the US Energy Information Administration, domestic demand fell from about 8.8 million b/d for the first week in December to about 8.5 million at the end of the month. In the summer, demand hit well over 9.8 million b/d.
Butane did shoot higher at the very end of the year, going from 84 cpg on December 1, to 99.25 cpg on Thursday. It touched 126.5 cpg on December 28, during a feverish end-of-year bout of short covering.
Market sources, attributed the strength in butane to short positions unable to find physical barrels in the wake of exports, which tightened the market. The paper market for butane figured in as well, motivating some to buy to support forward positions.
The overall strength in gasoline was not attributable to strong butane (which is about 5% of a gasoline blend), but rather at least partly to exports, data suggests. The EIA gasoline figures show for the week ended January 6, finished gasoline exports were 981,000 b/d, compared with 472,000 in the first week of 2016.
For the week ended December 29, the EIA reported a record for gasoline exports, 1.149 million b/d.
It is difficult to overstate the sea change that exports represent in the market. As recently as the last week of December 2015, gasoline exports averaged about 350,000 b/d. The great majority of exports come from the Gulf Coast, as the East Coast is a net importer. The West Coast, while it has exported some gasoline in the past to Mexico and Canada, is a minor factor.
Mexico is the key destination for US gasoline. The EIA monthly data for individual countries shows that Mexico took in a record volume of gasoline in October 2016, 12.077 million barrels. In 2015, Mexico imported an average of 7.2 million bbl/month.
Of the total of 20.5 million barrels of gasoline exported in October, 12.077 million barrels went to Mexico. The infrastructure of Mexico’s refineries and pipelines has not been maintained, market sources said, so the current level of exports is likely to be sustained.
But is the price strength sustainable?
The EIA shows that while gasoline was strong at the end of the year, so were inventory increases. The first week of December, total gasoline stocks started out at 229.5 million barrels, but climbed to 235.4 million barrels at the end of the year, and hit 240.5 million barrels for the first week of 2017.
The 240.5 million barrel level is about even with the first week of January 2016, so we are starting the year about where we were last year.
High Operating Rates
We are entering 2017 with refineries running at a very high rate. In the Gulf Coast, refineries are at 96.4% of capacity, compared with 95.7% a year ago.
Margins are also up. A 3-2-1 calculation for the Gulf Coast by PetroChem Wire shows $10.50/bbl on December 1 and $12/bbl on Thursday; on January 11, 2015, the figure was $9.83/bbl.
So we are entering 2017 with high inventories, but with good export demand and high refinery runs (and therefore gasoline production). It is clear that exports are crucial.
One source felt prices were sustainable at this level, but pointed out how quickly the US built inventories up over only a few weeks. “Things change fast,” he said.
Refinery margins rebound in the Gulf Coast as gasoline prices climb
HOUSTON, December 16, 2016 (PCW) -- Gulf Coast refinery margins have shot surprsingly higher in recent weeks, despite tepid domestic gasoline demand, PetroChem Wire data show.
Also, cheap naphtha and blendstocks like butane were expected to allow gasoline blenders to make less expensive winter gasoline, a situation that tends to undermine refinery margins. On November 1, the NYMEX RBOB settle was backwardated by 3 cpg from December to January, but on Decemeber 15 it was at a 1 cpg contango.
In short gasoline has gone up when it was expected by some to remain low.
Domestic demand for gasoline fell from November 1 to December 15, according to US Energy Information Administration figures, going from about 9.1 milliion b/d to 8.9 million. Diesel demand was steady at about 4 million b/d.
Crude oil has been stronger. Front month WTI from November 1 to December 15 in this period went up about $4.23/bbl ($46.67/bbl to $50.90/bbl), or 10 cpg; gasoline in the Gulf Coast, however is up about 14 cpg ($1.3266/gal to $1.4673/gal).
Refinery margins in the Gulf Coast based on a 3:2:1 crack spread (3 barrels of crude yielding 2 barrels of gasoline and one barrel of diesel) have gone from $8.78/bbl on November 1 to $11.20/bbl on December 15, PetroChem Wire data show (it hit $5.70/bbl in mid-November).
During the same period the NYMEX 3:2:1 crack actually fell 85 cents, from $16.12/bb; to $15.27/bbl.
In addition, fluid catalytic cracking margins were up. The PetroChem Wire calculates a margin based on front month WTI and 70% spot gasoline and 30% diesel.
On November 1 the FCC margin was $12.18/bbl, but by December 15 it had risen $1.42/bbl to $13.60/bbl.
VGO trades as a differential to WTI. On November 1, sweet VGO was assessed at plus $5/bbl; on December 15 it had risen to $7/bbl.
In other words, while the cost of VGO went higher, the margins of putting it into an FCC and making gasoline and diesel went higher anyway.
So gasoline demand is not all that great, crude is up but gasoline is up even more, and refinery units like FCCs are showing better economics, at least in the Gulf Coast.
The reason for this relative strength appears to be increased exports, especially of finished gasoline, For the week ending December 9, the EIA showed the US exported 1.131 million b/d of gasoline, which, is an all-time record. Last year at this time the export number was 616,000 b/d.
The US only a few years ago was a net importer of gasoline, but it now exports to Latin America, especially Mexico. In September, Mexico took about 10.2 million barrels of gasoline from the US, about double what it did in September 2015, according to the EIA.
Mexico has not put sufficient effort into maintaining refineries and infrastructure, sources said, so the imports there are likely to be a more or less permanent feature of the market.
US blendstocks trade against virtually non-existent, minor grade of gasoline; change is unlikely
HOUSTON, December 9, 2016 (PCW) -- US gasoline blendstocks will continue to be priced against a grade of gasoline that virtually does not exist in the domestic market because a change would be “an accounting nightmare.”
Gulf Coast gasoline blendstocks, such as alkylate, raffinate and reformate, as well as heavier naphtha, have for decades traded as a differential to conventional gasoline, known as “M” grade (a reference to nomenclature used by the Colonial Pipeline for conventional gasoline).
Alkylate, for example, is currently trading at 22 cpg over pipeline M4 gasoline, raffinate is at 16 cpg under M4, and reformate is 37 cpg over M4. Naphtha was assessed at 19 cpg under M4 (The ‘4’ refers to the gasoline RVP, which changes throughout the year).
Conventional gasoline is just exactly what it sounds like, 87 octane gasoline that has been used in domestic cars forever.
Beginning around 2006, however, the US began a federally mandated program putting increasing volumes of ethanol into finished gasoline. Today, those volumes, in effect, require virtually every gasoline of retail gasoline in the US to contain 10% ethanol.
The grades of gasoline are called “CBOB” and “RBOB,” for Conventional Blendstock for Oxygenated Blending,” and "Reformulated Blendstock for Oxygenated Blending." Both grades are 83.7 octane and, when blended at 90% with 10% 115 octane ethanol, make 87 octane finished gasoline.
RBOB is used in higher pollution areas, like Houston, Dallas, Chicago, Milwaukee, and the Eastern Seaboard from Boston to Washington DC. A form of RBOB called CARBOB is exclusive to California. CBOB is used everywhere else.
CBOB Two-Thirds of Demand
Effectively, RBOB is one third of US demand and CBOB is two-thirds.
There are some places one can still fill up one’s car with conventional gasoline, notably Oklahoma, where a few retailers protest the ethanol mandate. Also some locations use conventional in marine applications where gasoline with ethanol has never been embraced.
But it is a very rare grade. The Colonial Pipeline tried to stop shipping conventional gasoline some years ago, but relented after market objections. It currently does not list the lowest RVP grade of conventional, M1 – what used to be the benchmark ‘Southern Grade’ gasoline – at all for shipping.
Mostly for Export
However, plenty of conventional grade gasoline is still produced in the Gulf Coast, but it is for export, mostly to destinations throughout Latin America.
It would make more sense to have all blendstocks trade against CBOB, the new “conventional” gasoline. But it is not likely to happen.
“There are swaps and other contracts for blendstocks that are priced against conventional gasoline,” commented one broker. “Hundreds for sure, I don’t know how many ... how would you unwind them?”
The swaps are long-term sales, tied to publications’ assessments, internal transfer prices, all tied to a grade of gasoline that, although it still is traded, is hardly a presence in the US.
It was hoped by some that the ethanol mandate would be lifted, in that one of its intended reasons to exist, to lessen US dependence on foreign oil, seems to have been solved by the shale crude revolution.
But that did not happen, and it appears that the new US administration does not have any intention of changing the status quo.
More Ethanol for 2017
In fact, the most recent renewable fuels requirement announced in late November by the US Environmental Protection Agency (which administers the program) has upped volume of ethanol for 2017.
To some, it may not be a big deal that the blendstocks are priced off an almost non-existent grade of gasoline. As assessed by PetroChem Wire, CBOB was trading at 9 cpg under the NYMEX RBOB settle, while M grade was 5 cpg higher at minus 4 cpg.
Others might feel uncomfortable with this situation and push to change to CBOB. If the Colonial Pipeline has in fact decided to not ship M grade, the industry might be forced to change.
VGO differentials, FCC margins softer on weak gasoline fundamentals; little incentive to up FCC runs
HOUSTON, November 18, 2016 (PCW) -- Vacuum gasoil differentials on Thursday hit their lowest levels since March, driven down again by the fundamentally weak gasoline market.
VGO is a major refinery feedstock, which is inputted into a fluid catalytic cracker (FCC) to make gasoline and diesel.
Typically VGO trades as a differential to WTI and usually holds a premium.
On Thursday, sweet VGO was assessed by PetroChem Wire at December WTI plus $4.25/bbl. As recently as November 1, the differential was $5.50/bbl, and on October 4 it was $7/bbl. The last time it was as low as $4/bbl was March 7, according to PCW assessments.
When VGO is inputted into an FCC, the rule of thumb is that it produces 70% gasoline and 30% diesel (as well as other by-products). When one takes the cost of VGO (in this case the price of WTI and the differential) and compares the Gulf Coast value of the products (using 70% gasoline and 30% diesel), a margin (“the FCC margin”) can be calculated.
So as the differential over WTI goes down, one might think the FCC margin would go up, but in fact the opposite has happened. On Thursday, the FCC margin based on PCW prices was $10.66/bbl, down from $12.18/bbl on November 1; on October 4 it was $14.92/bbl.
To be fair, this weakness occurred during a period when a Colonial Pipeline leak was being repaired, which meant significant gasoline volumes that would have gone to the East Coast were temporarily kept in the Gulf Coast (things are back to normal now). But at the same time, refiners such as Total and ExxonMobil reacted by cutting cut crude runs, therefore producing less gasoline.
In fact, measured by the US Energy Information Administration, as a percentage of capacity, Gulf Coast crude runs were low in this period. For the week ending Oct 7, Gulf refineries ran at 86% of capacity, down from 90.4% the previous week. They stayed at roughly that level until the most recent numbers for the week ending Nov 11, when they hit 91.1%.
And during this period exports of gasoline were very strong, averaging about 850,000 b/d, about 450,000 b/d over the same period in 2015.
So, despite lower VGO differential prices (an incentive to run VGO), lower crude inputs (which would make gasoline) and strong exports of gasoline, FCC margins were lower anyway.
Refinery Grace Propylene
One by-product of an FCC is refinery-grade propylene, a feedstock that can be used to make alkylate or to produce polymer-grade propylene.
RGP prices have fallen in this period, dropping from 32 cpp on Oct 3 to 16.5 cpp Thursday. This is perhaps reflective of the price of alkylate, which has been up and down.
Alkylate is a 92 octane, low-RVP gasoline blendstock that is more valuable in the summer. In the winter it is often stored for use in the spring. It trades as a differential to gasoline.
On Oct 3, alkylate was assessed to a low of 15 cpg over gasoline, but recovered to 25 cpg by Thursday. Those numbers, however, are still at historic lows.
With VGO margins low and RGP down as well, there is no incentive to run an FCC harder than at minimum rates. One would think that would tighten RGP, but so far that does not appear to be the case.
US styrene hits 15-month high as global prices skyrocket amid tight supplies
By guest blogger Samantha Hartke
HOUSTON, November 10, 2016 (PCW) – The front-month US spot styrene price was assessed today at $1085/mt (49.2 cpp) FOB USG, marking a 15-month high, as global prices similarly saw multi-year highs amid an extremely tight global supply situation.
The last time US spot styrene was at this level was late August 2015, when it was assessed by PetroChem Wire at $1090/mt (49.4 cpp) FOB USG.
The recent spike comes as part of a wave of global styrene strength. On Wednesday, Asian front-month styrene shot up $30/mt to $1150/mt CFR China and Europe gained $25/mt to $1048/mt CIF ARA, marking year-to-date highs for these markets.
The reason for these increases is global supply tightness.
In the US, Westlake’s 260,000 mt/yr Lake Charles styrene unit shut down in mid-October after a fire at the unit. A force majeure on styrene was declared shortly thereafter. The unit is expected to restart at some point this week.
Ineos Styrolution’s 450,000 mt/yr Texas City plant went down almost two weeks ago and a restart timeframe is unknown. Meanwhile, Shell’s 365,000 mt/yr Scotford plant is in restart mode after a month-long turnaround.
Currently, 26% of North American styrene capacity is down with Scotford’s 9% expected to fully to return to service soon.
US production levels are at their lowest ebb since 2Q 2015, according to AFPM data, coming in around 2.6 billion lbs in 3Q, compared to nearly 2.9 billion lbs in 2Q and 2.7 billion lbs in 3Q 2015.
The situation is just as tight around the world. Among the units down: Unigel’s Cubatao unit in Brazil; SK Global’s Ulsan plant and Saudi Polymers’ Shuaiba plant, totaling 930,000 mt/yr of lost production. In Europe, BASF’s styrene unit at Ludwigshafen – the site of a deadly blast – is slowly ramping up to full rates.
Asia is also just exiting a heavy turnaround season in 3Q with China having reduced the capacity of a slew of aromatics units to lower pollution levels during the G20 meeting in Hangzhou in September. As a result, eastern China’s inventory levels are quite low, coming in at 55,000 mt this week, compared to the historical average of about 100,000-120,000 mt.
Market sources said the situation is likely to remain tight through year’s end with late Dec deals being reported at the current assessed levels, indicating domestic tightness amid continued hot demand for exports. The tightness could well extend into the new year as global forward styrene markets for Jan are barely in backwardation, according to Thursday’s bid and offer ranges.
Changes in China markets to cast bearish shadow over US reformate, despite strong gasoline demand, exports
Reformate differentials in the US Gulf Coast have fallen consistently over the last year, despite the ups and downs of the overall market.
When naphtha is inputted into a catalytic reformer, reformate is produced, typically a low, 1 RVP 100 octane gasoline blendstock.
Reformate can either be used directly in gasoline blending or petrochemicals, or be further inputted into an aromatics extraction unit, where it makes benzene, toluene and xylene.
Toluene and xylene can be gasoline blendstocks and petrochemical feedstocks. Benzene, however, has very limited use as a blendstock, especially in the US where it is federally mandated to make up less than 1% of overall gasoline content.
Because of its low RVP, reformate is valuable as a blendstock when used with higher RVP light naphtha and natural gasoline to make gasoline.
One would think that with excess naphtha and natural gasoline in the market (the result of lighter crude production since the advent of shale), there might be bullish pressure on reformate to blend gasoline.
But that has not been the case. Reformate trades at a differential to gasoline. On November 2, 2015, reformate was assessed by PetroChem Wire at gasoline plus 71 cpg. But the market has trended lower since then, and on Wednesday, reformate was assessed at gasoline plus 37 cpg, a nearly 48% decline.
Much of this weakness occurred during a period of strong domestic gasoline demand and higher gasoline exports.
In fact, while domestic demand for gasoline was 9.1 million b/d for the last week in October, marginally lower than last year, exports were an all-time record of 7.94 million barrels in August, up from 4.39 million a year ago, according to EIA data.
So why would reformate be weak? Market sources said it is at least partly attributable to changes in China.
While the EIA does not specifically track exports of blendstocks, it does report non-crude exports to China. This data set has seen a dramatic drop. In August 2015, the US exported 7.27 million barrels of products to China; this August, that figure was 1.823 million, a nearly 75% fall-off.
Earlier this year, China increased tariffs on reformate imports, putting it at parity with finished gasoline (formerly it was at a discount). At the same time, China has increased its domestic crude runs to the point it is now a net exporter of many products, such as gasoline and diesel.
China is now competing for export outlets with India and Singapore, market sources said, which will make it a limited outlet for US exports of gasoline.
This seems to be a trend that will not reverse itself anytime soon and should remain a bearish for US reformate in the longer term.
Crude, gasoline bullish run likely short-lived by high 2017 inventories
HOUSTON, October 28, 2016 (PCW) -- Crude oil and gasoline prices have increased in recent weeks and crude inventories are down, but has the market turned bullish? Inventories of gasoline suggest the answer is no -- not by a long shot.
Since September 1, front month WTI has pushed up $6.56/bbl, from $43.16/bbl to $49.72/bbl on Thursday.
In the same period, Gulf Coast CBOB gasoline was assessed by PetroChem Wire at $1.2774/gal to $1.3985/gal, an increase of 12.11 cpg or about $5.86/bbl.
Gasoline production has dropped in this period, according to US Energy Information Administration figures, from 1.0173 million b/d for the week ending September 2, to 9.837 million b/d for the most recent figures, the week ending October 21.
So crude and gasoline prices are up and gasoline production is down. And gasoline stocks did fall about 1.7 million barrels from September 2 to October 21 to 226 million barrels.
But those gasoline inventories are still extraordinarily high. For the week ending October 21, total US gasoline stocks were at 226 million barrels per the EIA -- an all-time record for the third week in October.
That current gasoline figure is about 7.4 million barrels over last year (for the third week in October), 23 million barrels over 2014, 13 million barrels over 2013, and 26 million barrels over 2012.
In short, we are going to enter 2017 with very high inventories.
Gasoline demand has been good. For the most recent week it was 9.1 million b/d, essentially flat to October 2015.
At the same time refinery inputs were lower. On September 2, total US inputs to refineries were at 93.7% of capacity. On September 21, the figure was 85.6%. In 2015, the comparable figures were 90.9% on September 2 and 87.6% in October.
So even with markedly lower inputs to refineries and essentially flat demand, gasoline inventories are at record levels for this time of year.
Low Octane Components
The EIA figure for stocks is “total” gasoline stocks, meaning it includes gasoline blendstocks, which is unfinished gasoline like light naphtha and natural gasoline. Those are low octane components that can be turned into finished gasoline when blended with mixed xylenes, toluene or alkylate, among others.
Some of those components are made from lighter grades of crude that have been produced by fracking.
Sophisticated refiners in the US turn about 50% of the crude they run into gasoline. It is hard to see how the market could head significantly higher when gasoline is so long.
We are heading, after all, into the winter season when domestic demand typically falls off.
One thing that could turn this around is exports, and those are indeed up. Given our current inventory situation, they will need to increase.
VGO differentials to WTI touch lowest level since August, could tighten RGP markets
HOUSTON, October 21, 2016 (PCW) -- Vacuum gasoil differentials have equaled their lowest levels since August as the PetroChem Wire low sulfur barge assessment fell 50 cents to November WTI plus $5.25/bbl.
Before touching $5.25 in August, the market had not been this low since March.
VGO is a refinery feedstock that is inputted into a fluid catalytic cracker, a major gasoline producing unit at a refinery. The rule of thumb is that an FCC produces 70% gasoline and 30% diesel (as well as other by products like refinery grade propylene).
Typically, VGO trades at a differential to WTI and usually at a premium. A refinery can make its own VGO and input into an FCC, or (as is typical in the US Gulf Coast), have a large FCC that is configured to allow it to be supplied with VGO purchased from the spot market.
In the Gulf Coast, refineries were historically designed with large FCCs that were supplied by European-sourced material.
An FCC is a gasoline-driven unit. They were installed to make extra gasoline when gasoline was needed; in Europe, gasoline is as dominant a fuel as it is in the US.
Gasoline, especially in the shale era, can be made in different ways. In the current market, light naphtha, natural gasoline (that in some cases is gathered by truck from a crude oil field), and heavier naphtha can all be blended, resulting in finished gasoline that, in a sense, does not come directly out of a refinery.
FCC Not Idle
So you don’t need an FCC (cost: $1 billion) to make gasoline. But once you have one, a refiner is not going to let it sit idle.
The highest that VGO differentials were this year was on April 15 when they hit WTI plus $10.25/bbl -- which was still historically low. Back in 2008-12, they were routinely as high as WTI plus $25/bbl.
But consider that on April 15, NYMEX RBOB settled at 146.12 cpg. On Thursday it settled at 149.37 cpg, so gasoline is up 3 cpg. Meanwhile, NYMEX WTI on April 15 was $40.36/bbl (96 cpg). On Thursday, it was $50.43/bbl (120 cpg), up $10/bbl or about 24 cpg.
So crude is up, while gasoline is gaining at the same magnitude.
VGO differentials, however, were marginally up over the summer, generally between $6-7/bbl over WTI, but overall trended lower, hitting $5.24/bbl on Thursday.
Lower VGO differentials suggest that refiners will run FCCs at low rates and this suggests that RGP, which is a by-product of FCC runs, will trend lower. Refiners run VGO to make gasoline, not RGP, but if inputs to FCCs are deemed uneconomic then RGP production will inevitably fall.
Combine this with the newly emerging PGP export market, and you could have an RGP market that could be tighter.
What could change this? Lower light crude oil production might mean less light blendstocks, which would tighten naphtha and make blending less attractive.
Also increased gasoline exports, especially to Mexico -- where there are a host of refinery issues and declining infrastructure (see last week’s blog) -- could boost refinery margins.
US gasoline exports hit record high, helped by growing demand from Mexico
HOUSTON, October 14, 2016 (PCW) -- Exports of gasoline from the US hit an all-time high last week with Mexico taking record amounts.
The US Energy Information Administration statistics released Thursday for the week ending October 7 showed exports of 805,000 b/d from the US. As recently as June, the weekly export figure averaged 380,000 barrels over four weeks.
The US has been an aggressive exporter of gasoline since the beginning of the shale crude era. In June 2010, the US exported only about 8.5 million bbl/month, per the EIA. In June 2012, that figure shot to 10.2 million bbl/month and by June 2015, to 11.9 million bbl/month.
The US exports gasoline all over Latin America (as well as Africa and even Asia). But Mexico is by far the largest destination.
In 2015 Mexico averaged imports of 237,000 b/d, about half of the total US exports of gasoline and about seven times the volume of other large importers, such as Ecuador or Colombia.
In July, the 275,000 b/d Cadereyta refinery in northern Mexico was shut because of insufficient water supply for boilers. By the last week in July, total US gasoline exports had increased to 454,000 b/d, hitting 655,000 b/d in early September and 805,000 b/d last week.
The weekly EIA statistics don’t break out destinations by individual country, but the monthly numbers do. However, they are delayed by a few months.
It is not clear if the Cadereyta refinery is still down or perhaps running partial rates. One trader with Latin American connections said it remained out of operation.
Another source estimated that lack of maintenance in the entire Mexican refinery system now means that it is able to supply “50 percent” of what it could a few years ago. Total Mexico refinery crude capacity is about 1.25 million b/d.
“Mexico is the new Venezuela,” said another source.
Imports to Mexico are likely to come from the Gulf Coast and not the West Coast, as the latter market has had refinery issues for much of this year and has significantly less ability to make extra gasoline even when plants are running at full capacity.
The effect on the Gulf Coast is demonstrated by gasoline differentials. On June 1, NYMEX gasoline closed at 161.53 cpg. The CBOB market traded at 11.5 cpg under the NYMEX, putting the outright price at 150.03 cpg. On Thursday, the NYMEX closed at 148.16 cpg, but the CBOB spread was 1.75 cpg under, or 146.43 cpg.
The Gulf Coast NYMEX gasoline spread has tightened by almost 10 cpg; the NYMEX fall had almost been made up by the tightened spread.
Higher inventories douse alkylate differentials, despite record gasoline demand
HOUSTON, October 7, 2016 (PCW) -- Alkylate differentials have remained low this summer, pushed by oversupply and the start of the higher RVP driving season.
Alkylate is a lower volatility (5.5 RVP), high-octane (92) gasoline blendstock that is prized for its lack of aromatics, its essentially clean specifications, as well as its low RVP for summer gasoline blends.
It trades in the Gulf Coast at a differential to conventional gasoline.
Last October at this time, alkylate was assessed by PetroChem Wire at gasoline plus 31 cpg. On Thursday, alkylate came in at 14 cpg. Reformate, another important blendstock component, was 58 cpg over gasoline last year and is now 36 cpg over gasoline.
At least part of the explanation lies in the relentless build in gasoline blendstock inventories.
The US Energy Information Administration lists “Gasoline Blending Components” in its weekly report, but those figures don’t break out specific components, although they include alkylate.
The EIA shows that in PADD III (the Gulf Coast), blending component inventories fell marginally from about 75.3 million barrels in January to 74.4 million barrels in September, which is the most recent data that EIA has available.
This is in marked contrast to 2015 where inventories started in January at 70.1 million barrels and dropped to 64.3 million in October.
Essentially, inventories this year have built when they typically should have dropped. Other years follow a similar pattern to 2015: blending components are stored in the winter in anticipation of the driving season and are worked down over the summer.
This year, inventories built despite gasoline demand that is near an all-time record. The EIA listed gasoline demand as 9.3 million b/d for the week ending September 30, up 3.9%. For much of the summer it was 9.7 million b/d.
Store now, sell later
Typically alkylate should be weaker as the market heads into winter, when gasoline RVPs increase to 13.5 RVP in the south and 15 RVP in the north, and alkylate (at 5.5 RVP) is less in demand than in the summer (7.8 RV and 9.0 RVP).
Right now the best option for those long alkylate may be to store it for spring. The absolute price of alkylate Thursday was about 165 cpg. It costs about 2 cpg per month to store it, so if you held in until April –seven months—it would cost 179 cpg.
The April NYMEX right now is about 170 cpg. Assuming the Gulf Coast is trading at a 5 cpg discount – 165 cpg -- and alkylate is 14 cpg over that (179 cpg), players are breaking even right now.
However, the spread is likely to increase going forward. If it goes from 14 cpg to 25 cpg, that 11-cpg spread can be an attractive alternative to trying to sell today.
Venezuela's oil supplies to the US are at risk, as are low US pump prices
HOUSTON, September 30, 2016 (PCW) -- US commercial crude oil inventories showed a 1.9 million barrel decline, to 502.7 million barrels, for the week ended September 23, the fourth straight weekly drop. Just a month ago, for the week ended August 26, the stocks were 525.8 million barrels.
At the same time US production was more or less steady at about 8.4-8.5 million b/d.
Throw in an informal OPEC meeting where it is announced that crude production may be cut, and you have a fairly impressive crude increase of $2/bbl, to $45.83/bbl from Monday to Thursday.
So has the trend of the market changed?
International supply being what it is, there is no certainty that the production cuts would be honored by OPEC members like Iran, or by Russia.
However there is one event that could cause an immediate spike in crude prices: a meltdown in Venezuela. PDVSA, the Venezuelan state-run oil company, is under extreme pressure, according to a report by the Columbia SIPA Center on Energy Policy.
The August report, entitled Venezuela’s Growing Risk to the Oil Market, said that lower oil prices have pushed Venezuela to the breaking point. “The cash-flow situation of PDVSA is so critical that even a steep cut in its dollar transfers to the government could not keep it from falling into arrears with key oil service providers.”
The report states that Venezuelan total production that had been steady at about 2.6-2.7 million b/d has dropped to 220,000 b/d in the first six months of 2016.
“Political conflict in Venezuela has significantly intensified," the report states. "This started to happen with the electoral loss the government faced during the December 2015 legislative elections, which resulted in the opposition winning two thirds of the National Assembly. But the government has failed to recognize the electoral results and has de facto thwarted the capacity of the National Assembly to legislate, using its control of the Supreme Court to declare the laws issued by the elected assembly as unconstitutional.”
The decline of Venezuelan oil industry is truly jaw-dropping. When Hugo Chavez took control of Venezuela in 1999, the country averaged 45.4 million barrels a month of crude exports to the US, per the EIA; in 2015 that figure was 25.2 million.
The reason for this, market sources have said, was the lack of maintenance of vital crude oil infrastructure by the Chavez and Nicholas Maduro governments.
The refining sector is equally bleak. Venezuela is a country with a population of 31.4 million, and a refining capacity of about 1.2 million b/d. The system is configured to allow exports, which makes sense in that the country has cheap crude and good access to northern and southern hemisphere products markets.
In 1999 Venezuela exported about two million barrels a month of gasoline to the US, maybe eight cargoes per month. As of 2015 that number is effectively zero at about 2,000 barrels a month, or one cargo for the entire year.
Diesel exports to the US in 1999 were 1.6 million barrels a month; in 2015 that figured has dropped to literally zero.
In fact Venezuela now actually imports gasoline components from the US (akin to taking coal to Newcastle), so they can keep prices low at retail for an increasingly rattled middle class. Gasoline has always been a cheap, subsidized perk for citizens; the current price is about 20 cents per gallon.
Citizens of Venezuela now buy cheap gasoline by the can and take it across the border to Ecuador, where it can be sold or exchanged for food and other necessities.
The US imported 20.1 million barrels of crude from Venezuela in June, according to the EIA, or about 670,000 b/d. US refineries consumed 16.1 million b/d of crude last week, so 4% of our crude runs are with Venezuelan oil. That’s a lot, and if that supply were cut off, the result could be sharply higher prices.
The market shot up this week on the crude draw in the US, among other factors. Still the EIA described crude inventories as “at historically high levels for this time of year.”
A political upheaval that would cut off or curtail crude supply to the US is not unthinkable. In fact that would allow other OPEC members to produce crude to make up for any shortfall.
Bullish EIA crude, gasoline inventory figures a head scratcher, is correction in the works?
HOUSTON, September 23, 2016 (PCW) -- Inventory figures issued by the US Energy Information Administration threw the market a curve ball Wednesday, showing huge draws in crude and gasoline.
The market had expected the opposite. One bank issued its weekly inventory view that looked for a 3.6 million barrel build in crude stocks.
The EIA, however, showed a 6.2 million barrel decfrease. Gasoline was expected to decline 1.3 million, but showed a bigger drop of 3.2 million barrels.
November NYMEX WTI settled Wednesday at $45.34/bbl, up $1.29/bbl. October NYMEX RBOB finished up 3.44 cpg at $1.3960/gal.
This blog has argued over the summer that the market is fundamentally weak in crude and products and that spikes in the market were going to be temporary, effectively creating opportunities to sell short.
So, the question becomes: Have things changed? Has the market tightened?
In the past month, the market pushed higher after floods in Louisiana and bad weather in the East Coast caused refineries to lower runs as ships bringing crude to them were held out at sea.
By now the market had expected things would have come back to normal with crude delivered and stocks replenished. That does not appear to have happened.
One suggestion is that the crude may have been diverted elsewhere, to storage in the Caribbean, for example. That crude will eventually get here.
Another theory is that the numbers are simply wrong, that some company did not report correctly. Revisions to EIA numbers are not unheard of.
A mistake could have been made also in US production levels, which are lower than last year, but were only down by 19,000 b/d on the week. One source said production data is less reliable than other EIA data.
None of these explanations seem very satisfying.
“There is no way we drew that much crude in one week,” one source said.
The gasoline decline is also hard to explain. Demand over the past four weeks was essentially flat at 9.6 million b/d.
Average daily exports of gasoline over four weeks (as shown by the EIA) were up about 53,000 b/d, a total of 371,000 barrels for a seven-day week. Gasoline imports were down about 81,000 b/d, a total of 406,000 barrels for a seven-day period.
So flat demand and 777,000 barrels less supply – a deficit of 777,000 barrels. A long way from a weekly drawdown of 3.2 million barrels.
If you use all the week-to week figures, the implied drawdown comes to 2.642 million barrels, 550,000 barrels off the gasoline stock figure. Gasoline demand for that one week (ending September 16), was up 244,000 b/d -- another data point that is difficult to accept.
Refinery crude inputs have not changed significantly and there have been some turnarounds in gasoline producing units like fluid catalytic crackers and reformers last week.
Again none of this is really a satisfactory explanation. The feeling here is that there will be a correction next week, and a return to fundamental weakness.
Colonial Pipeline outage does little to change bearish gasoline situation despite short-term price upticks
HOUSTON, September 16, 2016 (PCW) -- This blog has argued for weeks now that gasoline is fundamentally weak, and as we head into winter, when more low-priced butane can be blended into gasoline, it should remain cheap.
While the fundamentals have not changed, the prompt market shot higher this week on news that repairs to the Colonial Pipeline’s gasoline line in Alabama will take longer than expected.
A leak was discovered last Friday, which necessitated the shutting down of one of the two Colonial lines. The leak directly affected the line that carries about 1.4 million b/d of gasoline from the Gulf Coast to the East Coast, terminating in New York Harbor. A second line, which was also shut down in the area, carries about 1.2 million b/d of distillates – diesel and jet fuel.
The market reacted -- October NYMEX RBOB shot up just over 8 cpg since last Friday.
The lack of the ability to ship has “just created a glut of products in the Gulf,” commented one trader. Gulf Coast gasoline has seen only a milder gain of about 3 cpg since Friday.
If the repairs take another few days and the line is down for, say, 10 days, that could lead to a cumulative gasoline shortfall of about 14 million barrels on the East Coast.
The US uses about 9.4 million b/d of gasoline, (based on US Energy Information figures), so that 1.4 million b/d constitutes about 15% of total domestic demand and 40% of the East Coast demand -- not a small amount. Mid-morning Friday, Colonial stated that repairs were progressing on its gasoline line, and that it had shifted some of its gasoline to the second distillate line.
Still it will be at least a few days before things return to normal. And consider that the pipeline runs at 100% capacity, so lost supply cannot be “made up” by running the line harder.
Supplying extra gasoline to the East Coast would not be too difficult over time. Canada and Europe are routine suppliers of gasoline already and Caribbean blenders could deliver as well.
If the problem persisted, the federal government could suspend the Jones Act and allow ships to move from the Gulf Coast to the East Coast. If not, traders can take gasoline to the Caribbean, replacing those that left for the East Coast.
Delivery from Canada or the Caribbean would take 5-7 days; Europe would be more like two weeks.
Early Friday morning, the October NYMEX RBOB was up 1.56 cpg to 144.58 cpg, while November was down 0.73 cpg to 137.12 cpg. October NYMEX WTI was down $1.00 to $42.91/bbl.
The market is long gasoline, but as was seen when the storms hit Baton Rouge, it can easily shoot higher.
Crude's price jump unlikely a bellwether for the future
HOUSTON, September 9, 2016 (PCW) -- The market reacted viscerally to the bullish inventories Thursday, which put crude supplies and production lower.
Crude stocks were the lowest in months and production took a hit as well. Imports were off significantly too, and overall demand seems to have locked in at higher levels.
The upshot was a WTI market that pushed up $2.12/bbl on Thursday, to $47.62/bbl.
Has the market turned? Seems unlikely.
The inventories simply reflect the effects of bad weather in the Gulf Coast, and the East Coast, market sources suggested Friday. “They’re all lined up in the Gulf (of Mexico) waiting to come in,” commented on trader, referring to crude ships.
And the US East Coast has also been affected by Hermine, delaying delivery of crude into refineries here.
There is “no way we drew 14 million barrels in one week on crude,” commented one broker.
Crude production is indeed lower. As recently as July 2015 it was 9.6 million b/d. Last week it was 8.6 million b/d.
Imports are the difference. In fact the week before last crude imports were 8.9 million b/d, the highest since August of 2012. Most of that increase is of course, Canada, largely immune to the weather.
But the US gets significant crude from the obvious sources like Saudi Arabia and Kuwait, but also Mexico, Colombia, Brazil, Venezuela, Nigeria, Russia, Norway and many others.
This blog suggested a few weeks ago that gasoline would remain weak as we headed into the winter, when gasoline is allowed to be blended with more (cheap) butane.
“The fundamentals of supply and demand have not changed,” commented one market participant.
RGP price strength, supply tightness due to lower FCC margins, weak gasoline
HOUSTON, September 2, 2016 (PCW) -- Refinery grade propylene prices have shot higher in the past month, driven by tighter supply, and perhaps, other factors.
On August 1 RGP was assessed by PetroChem Wire at 21.5 cpp. By Thursday, it was 33 cpp, an increase of almost 50%. In that time, polymer grade propylene went from 33.5 cpp to 42.5 cpp, a 21% increase.
In the same period, November Brent went from $42.60/bbl to $45.45/bbl, an increase of about 6.6%.
PetroChem Wire also tracks the price of alkylate on a cpp basis (it trades on a cpg basis) and this data appears below and as a graph in the Daily Refinery Focus. The graph shows that RGP, which was assessed lower than alkylate throughout the summer, is now trading at a significant premium.
Perhaps fluid catalytic cracking margins are part of the reason. An FCC takes vacuum gasoil and cracks it into 70% gasoline and 30% diesel; RGP is a by-product. The harder an FCC runs, the more RGP is produced.
But FCC margins have been hit by lower gasoline prices. On August 1, the margin was $11.88/bbl; on August 15 it was $13.07/bbl. It hit its high on August 24 at $18.89/bbl; by September 1 it fell all the way back down to $12.29/bbl.
Clearly this is tied to gasoline. After a brief flirtation with higher numbers, gasoline this month went dramatically lower as we headed to winter.
(In fact, a few weeks ago, this blog suggested any gasoline strength was going to be ephemeral, and that has largely proved to be the case).
On August 1, M2 grade gasoline was assessed at 130.36 cpg by PCW. It hit its high on August 24 at 156.46 cpg, up 26 cpg, before heading lower. Since then it has dropped 24 cpg to 132.3 cpg on September 1.
Those are remarkable numbers, not just in terms of the weakness but also the strength, and the overall volatility.
The immediate reason for higher levels was no doubt the flood-related issues that affected refineries, which included plants in Baton Rouge and on the lower Mississippi River.
Also, there were a few problems at larger fluid catalytic crackers in Houston, but they have since largely been resolved. With the subsiding of the water, the market fell.
Perhaps this is a lesson in volatility -- in the short-term, refinery issues can push the spot market up, but reality eventually asserts itself.
Barring a physical calamity like a hurricane, it is hard to theorize stronger gasoline prices. Naphtha of various grades are 32-38 cpg under finished gasoline in the Gulf Coast, a level that given the already relatively cheap octane boosters (save for toluene and mixed xylenes, which are indirectly tied to strong benzene), ensures that blending gasoline will remain cheap and FCC margins remain under pressure.
That will tend to keep inputs to FCCs lower and RGP production less than it might be otherwise. One might think that refiners might try to run FCCs harder to make RGP, but one source dismissed that, saying “refiners don’t run cat crackers to make RGP, but to make gasoline.”
Potential Lyondell plant sale shows struggle of merchant refiners
HOUSTON, August 26, 2016 (PCW) -- It seems like only a few years ago the US was decrying the lack of new refineries built here and calling for new plants. The most recent ‘new’ refinery built in the US was commissioned in 1976 -- the 200,000 b/d Marathon plant in Garyville, La.
Things have changed. Only Thursday, LyondellBasell indicated it had contracted with bank to explore selling its 263,000 b/d refinery in Houston. It is a highly sophisticated plant that can run light and heavy crudes.
While no ground has been broken to build a new plant, US refinery capacity has increased fairly dramatically in this decade. In 2010, the total crude capacity was listed at 17.597 million b/d; today it is 18.320 million b/d. Effectively, we have added a new 723,000 b/d refinery in six years.
But in 2016, one look at margins makes it clear why there is motivation to get out of refining. The NYMEX 321 crack gives a sense of what has happened to refinery margins.
Using history as a guide, note that the graph shows that summer margins are about as good they can get. They decrease as the market heads to winter, when higher RVP gasoline blends allow for blending increased percentages of cheap butane into finished product.
The NYMEX RBOB crack (RBOB vs. WTI) shows this. The August crack on Thursday was $14.89/bbl, dropping to $12.20/bbl in September and $8.92/bbl in December.
One issue with Lyondell is that it does not own its own crude oil. For many years and until a few years ago, it partnered with Citgo to receive cheap crude from Venezuela. Since that deal ended, the company has made itself more flexible, allowing it to run lighter and heavier crudes. And it did the right thing.
But merchant refiners – those without crude oil, retail or special niches – are struggling. Consider that recent refinery purchases are by PBF (ExxonMobil's Chalmette and Torrance, Cal. facilities), a company that has deep roots in trading oil and so is light on its feet. This is unlike Lyondell, which operates more like a major oil company.
Lyondell suitors listed as interested in the refinery include companies which have crude oil (Saudi Aramco, Cenovus and Suncor), which essentially means the plant would again get cheaper crude than what it currently pays on the spot market.
Spot Market Dependence
And Lyondell does not have a retail system, which means it is dependent on spot market sales. Valero, another interested party, does have extensive retail (although the company does not own the Valero retail outlets).
Also, the Lyondell refinery was intended also to supply its petrochemical plants with feedstocks, something that, in the age of cheap shale crude and cheaper NGLs, may be more economically done on the spot market.
Much of that light shale crude ends up split into naphtha, some of which is blended into gasoline, another reason refiners will struggle.
US benzene in extreme backwardation on lack of imports, disconnects with Brent, sends hedges into disarray
HOUSTON, August 19, 2016 (PCW) -- Benzene has pushed higher worldwide during the past six weeks and has put the typically contango US market into extreme backwardation.
Since July 1, US front-month benzene has shot from $2.18/gal to $2.60/gal on Thursday, up $0.42/gal or $17.64/bbl. In the same period, September Brent has gone from $50.35/bbl to $50.89/bbl, up a mere $0.59/bbl.
The ratio of benzene to Brent in this time frame has gone from 1.8 to 2.14.
Meanwhile, gasoline in the Gulf Coast has gone from $1.4410/gal to $1.4807/gal in the same period. The NYMEX RBOB September settle has gone from $1.52/gal to $1.4897/gal, a drop of $3.03/gal.
Dearth of Imports
Clearly the US, a net importer of benzene, has been affected by a sudden dearth of imports. According to US Census Bureau statistics, in the first six months of 2016, the US imported an average of just under 1.2 million bbl/month of benzene.
In May, the imports were just over 1.0 million bbl/month and in June (the last month for which statistics are available), the figure was 740,000 bbl/month.
The drop in imports coincides with the change from contango to backwardation. On July 1, PetroChem Wire benzene assessments were July at $2.18/gal, Aug at $2.20/gal and September at $2.23/gal.
On July 16, July was assessed at $2.25/gal, August at $2.27/gal and September at $2.27/gal.
In contrast on Thursday, August benzene was pegged at $2.60/gal, September also at $2.60/gal, October at $2.80/gal and November at $2.45.
Clearly the market does not see a quick fix to this supply tightness.
But the higher US prices have opened up international arbs somewhat.
On July 1, spot assessments in Korea were about $2.11/gal, with Europe at about $2.20/gal and the US at $2.18/ gal. But on Thursday, Korea was $2.24/gal, Europe at $2.44/gal and the US at $2.60/gal through September, so it would appear benzene will head to the US.
Difficult to Hedge
One problem is that benzene is extremely difficult to hedge, as it has a dodgy relationship with crude, naphtha and gasoline. Benzene can be produced when heavier naphthas are put in a reformer, but prices don’t seem to indicate that is happening.
On July 1, naphtha was assessed by the PetroChem Wire at about $1.17/gal, $0.27/gal off gasoline. On Thursday, naphtha was $1.19/gal, $0.30 off gasoline.
One problem is that the lighter shale crudes produce lighter naphtha, which in turn, do not produce as much reformer-friendly naphtha.
Current trade in Europe is above the August contract price of $723/mt (about $2.42/gal); the same is true of the US, where the August contract price came in at 228-229 cpg ($682-685/mt).
Record gasoline imports another bearish factor for prices
HOUSTON, August 12, 2016 (PCW) -- In last week’s blog I made a case for continued weakness in gasoline. That looked good until Wednesday when the US Energy Information figures showed a big draw -- 2.8 million barrels – in gasoline inventories. The previous week had featured a 3.3 million barrel draw.
Still on Wednesday the market fell anyway: September NYMEX RBOB was down 4.48 cpg to 130.14 cpg.
On Thursday, the International Energy Agency published its report, predicting a year-on-year growth in oil demand of 1.4 million b/d. And then a massive explosion at the Motiva refinery in Convent, La., caused the NYMEX to push up 6.03 cpg, to 136.17 cpg.
On the week the NYMEX finished at 137.09 cpg, up a mere 0.89 cpg
Still gasoline inventories are long, 19 million barrels over last year at this time. Inventories were 23 million over the year-ago period in the prior week.
Using the EIA demand figure of 9.8 million b/d, the US currently has 24 days’ supply of gasoline. In contrast, in the first week of August 2015, we had 22 days.
So in theory we are going to work down our inventories. Maybe.
But there is yet another reason – aside from the upcoming lower demand season -- why that is unlikely to happen: gasoline imports are at near all-time highs.
For the week ending August 5, the EIA showed the US imported 930,000 b/d of gasoline, compared to 683,000 b/d in the first week of August 2015, and 435,000 b/d in 2014.
The US exports gasoline mostly out of the Gulf Coast, but the pipelines that take it to the East Coast are at capacity, and because of the Jones Act, shipping is too expensive. The Jones Act requires shipping between US ports to be done by US-flag ships, not cheaper foreign flag vessels.
So the US East Coast typically gets incremental gasoline from Canada and Europe at a lower cost than it can be supplied from the Gulf Coast. European gasoline often goes to Africa, but apparently now the better netback is to bring those barrels to the US East Coast.
According to one source, European refinery netbacks are very good, so they are producing gasoline that is ending up in the US. US exports of gasoline have been steady to slightly weak, according to EIA data.
One blendstock trader added that toluene – a 106 octane gasoline blendstock – is also headed from Europe to the Gulf Coast. Those barrels originated in north Africa and were shipped to Rotterdam, where, apparently, they are not needed. The trader added: “There is more toluene headed here than you can say grace over.”
Recent gasoline strength a red herring; supply-demand situation remains loose
HOUSTON, August 5, 2016 (PCW) -- Timing is everything and mine was apparently perfect last week as I suggested gasoline would remain weak.
Of course coinciding with that blog was the news that PBF Energy was going to cut crude runs at its refineries by 6%. The company owns five refineries with a combined boilerplate capacity of 884,000 b/d.
So in the past week CBOB as assessed by the PetroChemWire is up about 8 cpg in the Gulf Coast, and NYMEX RBOB up almost 5 cpg.
Now this week comes the news that BP will take a crude unit and a fluid catalytic cracker at its giant (413,000 b/d) Whiting, Indiana, plant down for maintenance in the last half of September.
Gasoline stocks remain very high, however, at 238.2 million barrels, per the US Energy Information Administration statistics for the week ending July 29, which is 21.5 million barrels over last year.
Week on week, however, gasoline stocks drew significantly, down about 3 million barrels.
While some refiners may cut runs, others may not. One source mentioned Holly Frontier and Tesoro as being unlikely to cut runs, and Valero has indicated they will resist this as well.
The EIA tracks gasoline margins (using Brent and New York Harbor prices) and showed that last year, gasoline margins were about 52 cpg in June. This June, margins were about 35 cpg.
However 35 cpg isn't so bad. In June 2014, margins were about 23 cpg, June 2013 was 28 cpg, June 2012 was 32 cpg and June 2011 was 12 cpg.
If there are significant run cuts, crude prices will tend to fall and that should put some bearish pressure on gasoline. So such reductions by some may not be enough to boost prices.
Gasoline demand typically falls as the market heads into winter. In 2014, per the EIA, gasoline demand (on a four-week average basis) went from 9.615 million b/d to 9.169 million b/d between the first week of August and the first week of December.
Looking forward at the NYMEX RBOB spreads between September and October, the latter month marking the switch from more expensive, lower RVP summer gasoline toward less expensive winter gasoline, it seems as if the market has shrugged off gasoline strength.
On July 15, October RBOB was about 8 cpg under September; on Thursday, the spread was 9 cpg. This suggests the relative strength in the market was at the front month, but also that the fundamental relationships have not changed.
So while gasoline refinery margins are not as good as they have been in the recent past, they are not completely dire from a historical price perspective. Demand will fall as we head into winter, and although there may be run cuts, they will not be sufficient to significantly tighten the market.
Butane will be cheap and more and more of it will be allowed to be blended into finished gasoline as we head into winter.
Gasoline will remain cheap.
Around the corner from my house in southeast Houston, I can buy major-brand gasoline for $1.88/gal, up from $1.85/gal a week or so ago.
To the rest of the country, I say: read it and weep.
A hazy shade of winter (grade gasoline): Kicking the supply overhang can down the road?
HOUSTON, July 29, 2016 -- Last week’s blog (see below) pointed to the underlying weakness of gasoline: despite summer demand being high, supplies have not drawn down significantly and as the season heads to fall, gasoline is allowed to contain more cheap butane – a formula for continued weakness.
So far that prognostication -- hardly an original one -- looks pretty good. Gasoline demand, as per the US Energy Information Administration for the week ending July 22, was up 100,000 b/d to 9.8 million b/d, but gasoline inventories rose anyway by 500,000 bbls to 241.50 million bbls. Gasoline inventories stood at 241.5 million bbls, an astonishing 25.5 million over last year (215.9 million bbls), and 23.3 million over the previous year (218.2 million).
Gasoline demand is up significantly: in July 2015, it was 9.3 million bbls and in late July 2014, it was 9 million bbls. But even with higher demand, prices have fallen.
Since the previous week’s inventory reporting day, July 15, the NYMEX RBOB (September) contract has dropped 12.09 cpg to 130.11 cpg and the CBOB cash price in the Gulf Coast fell 8.84 cpg to 124.36 cpg (cash prices assessed by the PetroChem Wire).
Winter Grade Gasoline
This week, two refiners – Valero and Marathon Petroleum – acknowledged the situation and indicated some ‘other’ refiners have already switched to making winter-grade gasoline, which one cannot put on the market until late September.
In the summer, refiners make lower volatility (lower RVP) gasoline and as the market heads toward winter, they make higher volatility (higher RVP) gasoline so cars can start up more easily in the cold months.
So is the market going to ameliorate the current oversupply by creating more of an oversupply as we head to a lower demand season? Are we kicking the can down the road?
On paper, making winter-grade gasoline may make sense, even though the October NYMEX (against which the higher RVP grades will trade) is trading 8 cents below September.
The refiner can now make the higher RVP grades, using cheap butane – assessed Thursday at the bargain-basement price of 55 cpg (!) in the Gulf Coast – and back out higher-priced octane boosters like reformate (assessed at 154 cpg by PetroChem Wire on Thursday) and alkylate (144 cpg on Thursday).
By September, it will be turnaround season, so in theory, less gasoline will be produced, perhaps allowing a modest increase in prices: the cheaper gasoline may get sold into a tighter market.
Looking at the NYMEX RBOB curve, gasoline is slightly backwardated from October to December, and then only modestly in contango through February. NYMEX WTI, however, is in contango from now and well into next year, perhaps a signal that the market thinks these low crude prices will finally result in lower production levels.
Could higher crude and flat gasoline, which in theory puts pressure on refinery profit margins, set the stage for lower refinery runs and stronger gasoline?
But another bearish factor is exports. The EIA numbers show total gasoline production last week at 10.068 million b/d; demand is 9.8 million b/d. So we would need to export about 268,000 b/d to just maintain inventories at their current high levels.
Over the past year, the net exports of products (which includes distillates) have trended lower, likely a result of the narrowing Brent/WTI spread.
What the specific gasoline data suggests is that while exports of gasoline from the Gulf Coast (typically to Mexico and South America) are stable, imports (mostly to the East Coast from Canada and Europe) have trended higher.
Long gasoline inventories are likely to be with us for some time and it is difficult to see how this can fundamentally change as we head into winter.
As gasoline demand hovers near record, prices may soften
HOUSTON, July 21, 2016 -- Gasoline demand is up and is as high as it has ever been, now coming in at 9.7 million b/d, according to last week’s US Energy Information Administration numbers.
Only a few years ago, gasoline demand was 8.6 million b/d or so, and in the good economic years before the recession of 2009, it was only about 9.5 million b/d.
Domestic crude oil production, meanwhile, is off about 1.054 million b/d versus last year, per the EIA.
So good demand and tighter crude should lead to stronger gasoline prices, one would think. The market consensus, however, is that gasoline season is over. Barring a hurricane or some other calamity, gasoline prices can’t go significantly higher and are likely to go lower.
A combination of excessive volumes of gasoline and various naphthas, as well as other factors, will keep downward pressure on gasoline prices.
Total gasoline inventories for last week were 241 million barrels, up 16.7 million barrels over last year. In early May, total inventories were roughly 240 million barrels. This suggests while summer demand is good, inventories have still not been drawn down significantly.
Since May 2, NYMEX RBOB has dropped from 156.28 cpg to 136.37 cpg, a decrease of 19.91 cents. In the same period, Gulf Coast CBOB has gone from 141.03 cpg to 130.31 cpg, a drop of 10.66 cpg, according to PetroChem Wire data.
Again, all this took place in the summer driving season when gasoline demand was at near record levels.
One of the principal gasoline blending components is alkylate. It is a 92 octane, 5.5 RVP blendstock that is important for lower RVP summer grades of gasoline. Alkylate is seen by some as predictor of gasoline supply demand balances: the stronger alkylate is the more likely gasoline prices will go higher.
Since May 2, alkylate has fallen from 169.78 cpg to 154.37 cpg, along with the value of octane. The 87-93 spread has dropped from 19.75 cpg to 14.25 cpg.
As summer ends and fall begins, RVPs will rise, which means that more butane – a very high RVP blendstock – will be allowed in gasoline. Butane was assessed Wednesday by PetroChem Wire at 62 cpg.
One can think of it this way: expensive alkylate can be replaced, at least in part, by cheaper butane.
The change in RVP is reflected by the NYMEX RBOB market, where October is currently trading at 129.91 cpg, about 7 cpg below September.
So as summer gasoline demand winds down, gasoline will get less expensive to make, which should result in lower prices.