Strong Run Rate Coincides with Higher Gasoline Demand

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Fuel Marketer Intelligence: Supply Chain Dynamics to Retail Fuel Prices

A 10-year seasonal analysis of crude net inputs at US refineries using federal data finds the year-ended in late March was consistently the most robust, peaking in late July 2015 at 17.075 million bpd, which was more than 4% higher than the comparable year-ago period.

The expanded throughput rate was due to three factors—abundant crude supply, strong products demand domestically and for exports, and greater refining capacity.

Crude oil distillation capacity in the United States began 2016 at 18.044 million bpd, 409,000 bpd or 2.3% above the start of 2015, according to statistics from the Energy Information Administration. In 2015, US refiners averaged a run rate of 91.2%, up from 90.4% in 2014 and above the 88% five-year average and the highest utilization rate since 2004 when it reached 93%.

This time last year West Texas Intermediate crude traded on the New York Mercantile Exchange was two weeks into a rally that pushed the futures contract closest to delivery to 2015’s high at $62.58 bbl reached on May 6. The nearest delivered WTI contract would hold above $55 bbl until early July, with the holders of bullish bets banking on steep declines in US crude output on the belief low market prices and high production costs would force shut-ins.

The magic number was, and still is, for a break below 9.0 million bpd, with domestic production eclipsing the psychologically significant figure in the fourth quarter 2014 for the first time since 1986. Instead, domestic production would remain strong, peaking in April 2015 at nearly 9.7 million bpd, and beginning 2016 at roughly 9.3 million bpd.

WTI futures are now trading below $40 bbl and domestic crude production is beginning April down 7.2% form a year ago near 9.0 million bpd, which is a significant decline. However, US shale oil producers have confounded the world with their resilience, and refiners have ramped up their output to process the bounty.

The drop in procurement costs for refiners in securing crude have been passed onto the consumer in the form of lower prices for heating and transportation fuels, and have bolstered consumer sentiment despite sluggish economic growth. Pure-play refiners have also profited from the lower procurement costs, and for integrated oil companies it has been a bright spot in an otherwise gloomy market environment.

This spring, the gasoline crack spread—the margin achieved in processing a barrel of crude into gasoline has declined to a six-year low when calculating WTI futures against the NYMEX gasoline contract (reformulated blendstock for oxygenate blending or RBOB).

US gasoline inventory reached a 36-year high in the first quarter, and Econ 101 teaches us that supply abundance will pressure profits. Yet, crack spreads are quite healthy, beginning the second quarter just over $20 bbl, and when calculating the crack spread against Brent crude futures traded on the IntercontinentalExchange show a smaller decline against the year prior spring.

This can be explained with the massive buildout in US crude infrastructure, especially in the Houston area, and the ending of restrictions on US crude exports put in place in the 1970s. WTI, which had lost value against the Brent contract beginning in late 2010 during the early days of the shale oil revolution, briefly erased its discount position against Brent earlier in 2016 as the US crude benchmark was no longer landlocked.

US crude exports have been modest, slipping below 400,000 bpd in late January to now from 500,000 bpd, and are expected to remain limited in large part due to the prevailing global supply overhang. Yet, there is the psychological factor that the United States can now export crude that combined with this summer’s expansion of the Panama Canal effect world trade flows.

EIA shows US gasoline exports 12.9% below the five-year average at 400,000 bpd in late March, and 41% below a year ago in early March as global competition intensifies and Brazil, now in its second year of recession, dials back imports.

After a 3.1% year-on-year increase in 2015, domestic demand for gasoline remains strong. As we peer ahead, we should see the trend continue, with gasoline supplied to market running 3.6% higher in 2016 through March 25 than the same period in 2015, EIA data shows. Steady improvement in US employment, with the Labor Department reporting first quarter job gains have averaged 209,000 per month, bolsters the case for ongoing strength for gasoline demand in 2016.

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