U.S. refiners expect that strong export will boost margins and alleviate high product inventories



U.S. refiners have come out of sustention season, betting that big exports to Mexico and South America will help alleviate high product inventories. And backup margins as the critical summer driving season is close.

The first page of profits results from several large independent U.S. refiners. Which showed that they are not chasing U.S. gasoline profits. They already posses high inventories and steady-but-not-spectacular demand. They are actually taking advantage of demand from places like Mexico and South America, where sputtering local refineries cannot meet customer needs.

The biggest Companies

Marathon Petroleum Corp (MPC.N) expects to process more crude than ever in the second quarter, the company said on Thursday.

“The export book continues to be strong.” Gary Heminger, Marathon CEO said Thursday. Taking notice that he expects company exports to grow from about 200,000 bpd earlier this year to 300,000 bpd in the second quarter. They expect it to process about 1.82 million bpd in the second quarter.

– Valero Energy Corp (VLO.N), the largest U.S. independent refiner by capacity, said it expected its 15 refineries to run up to 96 percent of their combined capacity of 3.1 million barrels per day (bpd) in the second quarter. (Reuters)

There is a worry, however, that high run rates may overstep the ability of refiners to export products. U.S. gasoline inventories, which had been drawing down, have rebounded to uncommonly high levels for the season, sapping refining margins.

CEO of CVR Energy Inc (CVI.N), Jack Lipinski, said he fears a repeat of last year. When high inventories crushed margins. The company’s two refineries are landlocked and have no direct access to export markets.

“Even though we are seeing exports increasing, the increase in production is offsetting that.” (Lipinski)

Refinery crude

Refinery crude hit a record 17.3 million bpd last week and capacity utilization rates hit their highest level since November 2015.

“Right now, we are running at summer peak levels. If we stay at this level for several months, rising inventories will overwhelm exports. If we stay at lower levels, then exports can help balance inventories.” Mark Broadbent said.

The four-week average for exports of finished motor gasoline jumped to 643,000 bpd from 395,000 bpd a year ago while exports of distillate fuel oil climbed to 1.11 million bpd versus 1.01 million bpd a year earlier.

Anyway, while gasoline export loadings to Latin America have been anchored in the 600,000-bpd range for the past couple of months, march’s middle distillate export loadings were at an 11-month low. Matt Smith, who tracks cargoes for New York-announced this.

Gulf & East Coast refiners

U.S. refiners in the Gulf Coast, have cashed in on soaring demand for refined products from Mexico, even as margins CL321-1=R have languished at the lowest levels in about seven years seasonally.

East Coast refiners are stepping up exports of diesel despite a regional deficit of the fuel as strong overseas demand. Particularly in Europe, because it is proving more profitable.

  • “It’s a distillate world out there. Ultimately the narrowing in gasoline’s premium to diesel RBc1-HOc1 should prompt more diesel refining, tightening gasoline supplies.” That spread hit a four-year seasonal low on Thursday. 


Texas Oil will be used as North Dakota’s alternative ?

U.S. East Coast refiners are interested in buying increasing volumes of domestic crude oil from the Gulf Coast. This is the latest upheaval in the wake of the opening of the Dakota Access pipeline.

Major U.S. East Coast refiners profited from railing hundreds of thousands of barrels of discounted Bakken crude to their plants daily from 2013 to 2015. But after North Dakota authorities have built  more and more pipelines, the shrinkage began to disappear.

Today, at least two East Coast refiners, Phillips 66 and Monroe Energy, are looking to move more crude. By ship, from Texas sending it to the Philadelphia area.

The Dakota Access pipeline starts up in May, giving the Gulf approach to the Bakken shale play. It will likely exhaust any long-term economic incentive for Bakken-by-rail, which is more expensive.

This option is way more expensive than oil imported to the East Coast, typically from Nigeria. Analysts and traders expected that once the Dakota line came into service, East Coast and West Coast refiners would rely on foreign barrels.


Flagged Vessel Transportation

Shipping sources say that costs could range between $2.60 to $3.50 a barrel. Speaking for the two-week round trip on a U.S. flagged vessel. That is lower than the peak, brokers said, because a number of spare vessels are available. Taking a cargo of Nigerian Bonny Light to Philadelphia costs about $1.40 a barrel, brokers said.

They also said that bringing U.S. oil via tanker to the East Coast gives refiners access to a variety of crude stages available in Texas. And most of U.S. oil now finishes in Texas.

“It’s about optimizing assets. From Texas, you could bring up Eagle Ford, Permian or even Bakken crude.” (Reuters)

That journey could guarantee a steady supply of domestic crude, as both Phillips 66 and Monroe Energy already have U.S.-flagged Jones Act tankers contracted.
So, bringing that crude would not be difficult. Refiners use their tankers to mix products to higher margin regions or to bring crude to their refineries.

“Even with added Gulf shipments to the East Coast, refiners there should still receive the bulk of their supply from foreign sources due to economics”, said Sandy Fielden for Morningstar. (Reuters)

East Coast refiners

West Africa produces crude that is “gasoline rich,” he said, important for East Coast refiners. He said he doubts sending Jones Act tankers makes a lot of sense financially because the spread between global benchmark Brent LCOc1 and U.S. West Texas crude CLc1 futures is not enough to justify the shift.

Tim Taylor, Phillips 66 President said last year that the combination of the Dakota pipeline and water could potentially supply the 285,000 barrel per day Bayway refinery in Linden, New Jersey.

Transporting crude by water from the Gulf up the Eastern Seaboard is not a new ”project”. Since October, NARL Refining LP has booked at least seven cargoes from Texas ports to its 130,000 bpd Come-By-Chance refinery in eastern Canada (Newfoundland).  NARL booked just four Texas cargoes, in the previous ten months.