March 4, 2015
Increase in Gasoline, Diesel Imports Highlight Severe
US Supply Dislocations

The severe U.S. oil product supply dislocations are once again highlighted in the recent import flows of diesel and gasoil to the Northeast and the first gasoline open arbitrage window for the West Coast in five years.

While both coastal markets are importing oil products due to refinery issues on the West Coast and a cold snap on the Northeast, the U.S. Gulf Coast is exporting both gasoline and distillates. Gulf Coast products exports have grown substantially in the past year, and the outflow is expected to continue to rise in 2015 on the back of strong refining margins and a need to push products out to keep oversupply at bay.

The severe supply dislocations in the regional markets could be traced to expensive Jones Act freight rates as well as the limited availability of U.S.-flagged oil tankers. Jones Act tanker rates could be three times more expensive than foreign tankers.

The Northeast and the Mid-Atlantic could only receive Gulf Coast supplies via Colonial Pipeline, which has seen consistent pipeline allocations on its main lines in the past several years.

Jones Act ships are used to deliver products to the Southeast from the Gulf Coast, but that option has been limited by strong competition from crude shipping demand.

The niche West Coast market has been adequately supplied by local refinery production for the past few years, but Tesoro's Martinez refinery shutdown and ExxonMobil's Torrance refinery issues have opened up arbitrage opportunities for imports from Europe and Asia.

The West Coast could receive Gulf Coast supplies via ships sailing through the Panama Canal, but it is very rare that the economics would work for this route.

In theory, Gulf Coast, the main refining hub in the U.S., should be able to supply incremental supplies to both coastal markets. However, the high domestic shipping cost kills the arbitrage economics for waterborne deliveries.

Instead, it is comparatively more economical for traders to source foreign oil products from Europe and Asia than to buy domestic fuel from the Gulf Coast.

The Gulf Coast has been focusing on raising its export volumes for gasoline and distillates to South America and naphtha to Asia. West Africa could take Gulf Coast gasoline barrels occasionally.

OPIS has reported recently that a slew of Russian ULSD and gasoil cargoes are headed to the U.S. Northeast to satisfy a higher-than-normal seasonal demand for diesel due to natural gas supply rationing and strong heating demand.

Some of these ships from the Baltic region have already arrived in the Northeast, and more are on the way. However, at least one ship has been diverted to northwest Europe due to specs issues.

On the West Coast, gasoline and alkylates cargoes are expected to arrive in April, thanks to the soaring gasoline prices for both regular and premium grades.

Meanwhile, the Northeast is continuing to import gasoline from Europe, but the arbitrage economics have been hard to put a finger on due to the volatile U.S. and European markets. The European market is net long on gasoline, making it a natural exporter to the U.S.

March 2, 2015
Mystery of Actual Demand Surge Deepens; EIA Suggests Brisk Lift

Gasoline ended the year with a surge in demand, but the debate rages on as to the level of the increase. Energy Information Administration (EIA) data released on Friday showed a huge year-on-year increase of 4%, putting final December 2014 gas demand into the record books at 9.023 million b/d. Taken at face value, the number reflects an increase of 353,000 b/d from December 2013 and represents the highest 12th-month demand level since 2007. Two years ago, December gasoline demand averaged just 8.389 million b/d, according to EIA.

Most refiners and marketers believe that gasoline demand has definitely trended higher, but a 4% leap on a year-over-year basis evokes speculation of overstatement. Executives for publicly traded c-store chains generally reported smaller same store sales increases, and there were even some cases of demand attrition in fourth quarter 2014. OPIS Demand surveys conducted in December, which compile specific station data for about 5,000 sites nationwide, suggest a consumption increase of only 0.5%, with the West Coast and Midcontinent actually seeing softer volumes.

Even more controversy comes if one compares EIA weekly and monthly data. Traders have lost some confidence in demand trends recorded in the Weekly Statistical Bulletin, even though the report still commands the attention of the entire supply community when it is regularly issued each Wednesday morning. The weekly reports issued for December implied that gasoline demand across the 31 days of that month rose a whopping 6.5%, or 566,000 b/d on a year-over-year basis. The monthly report showed the much smaller increase of 353,000 b/d.

Close inspection of all reports suggests that the export side of the demand equation may be vexing EIA data gatherers. The final monthly report for December shows an export average of 679,000 b/d for finished gasoline and further exports of 196,000 b/d of gasoline blending components. The combined figure of 875,000 b/d represents motor fuel that is leaving the United States for elsewhere.

Weekly reports in December saw much more conservative estimates of departures. EIA doesn't issue a weekly estimate of blending components, but showed weekly finished gasoline export numbers that averaged just 356,000 b/d in the five statistical bulletins that cover December dates. So, the amount of gasoline (finished and unfinished) that left the country was 519,000 b/d more than what was suggested by the weekly data.

Estimates of imports, on the other hand, appear consistent and accurate. Weekly reports showed 776,000 b/d of combined blending components and finished gasoline in December. The final monthly report issued Friday listed 735,000 b/d.

A lot is at stake in the EIA data. For example, if year-to-date 2015 estimates are accurate, some 8.744 million b/d of motor fuel is moving from primary (reported) to secondary or tertiary (unreported) storage, and consumption by any measure is brisk. The same eight weeks in 2014 saw gasoline demand of just 8.286 million b/d, so the data implies a year-on-year increase of more than 5.5%.

Numbers recently issued by the Bureau of Economic Analysis (BEA) muddle the issue as well. BEA suggested that gasoline consumption in January 2015 soared by 5.8%, but contends that motor fuel consumption has averaged a 1.8% increase on a 12-month moving average basis.

February 26, 2015
PES Begins to Offer Limited Regular Gasoline for Sale amid
Refinery Restart

Philadelphia Energy Solutions has begun to offer regular gasoline for sale in the New York Harbor cash market on Thursday, but there are no prompt parcels available from the 355,000-b/d Philadelphia refinery, trading sources told OPIS.

PES, a regular gasoline seller in the Northeast and Mid-Atlantic, is only offering limited regular gasoline volumes for delivery at the end of next week, they said. Also, PES has not made an offer for premium gasoline so far.

The limited gasoline offers reflect the ongoing restarting process at the Philly refinery, and the refinery may take another several days to restore normal operating rates.

OPIS reported late on Wednesday that PES was in the process of restarting a fluid catalytic cracking unit and a crude unit at its Philly refinery.

PES reported a few flaring incidents last week, and so did PBF Energy. Flaring incidents at refineries amid cold weather could be attributed to the loss of steam.

OPIS reported on Monday that some Northeast and Mid-Atlantic oil refineries were continuing to run at reduced rates this week, following some operational hiccups last week due to extreme cold weather.

Monroe Energy restarted its Trainer, Pa., refinery along the Delaware River after a brief shutdown late last week, and it is now running at reduced rates. The refinery was forced to shut due to an inability to receive water supply from a frozen valve.

Phillips 66 had reduced operational rates at its Bayway refinery in New Jersey last week, but that refinery was expected to continue to run at lower rates during the cold weather.

The sputtering Northeast refinery operation status amid the cold weather caused some supply concerns, especially in the heating oil market. Gasoline remains adequately supplied based on the higher year-on-year inventory in PADD1.

February 23, 2015
Consumer Watchdog Pursuing Calif. Retail Gas Price
Manipulation Claims

The Consumer Watchdog said on Monday that it has sent two letters to California state officials since last week to verify refinery claims that shutdowns are really necessary.

However, it has not received a reply from the state authorities so far, it said. The letters were addressed to Gov. Jerry Brown (D), Attorney General Kamala Harris, Senate President pro Tempore Kevin de Leon and Assembly Speaker Toni Atkins.

Consumer Watchdog is a California-based nonprofit organization that advocates for taxpayers and consumer interests.

OPIS notes that the Tesoro Martinez, Calif., refinery is operating as a storage terminal due to a prolonged union workers strike, and ExxonMobil's Torrance, Calif., refinery is experiencing intermittent operational issues. Last Wednesday, OPIS reported an explosion at the Torrance refinery, and the FCC unit at that refinery could be shut for an extended time period.

The consumer group said that the retail price per gallon of gas in California has soared 53cts/gal between Feb. 2, when Tesoro began shutting down its refinery in Martinez, through Feb. 23.

A regular gallon of California gasoline now costs an average of $2.96/gal, it said.

Consumer Watchdog has twice written state officials, calling for them to investigate artificial price manipulation -- once after the Martinez refinery shutdown, and once after an explosion and fire damaged Exxon's Torrance refinery on Feb. 18.

"It's clearly time for lawmakers to hold refineries accountable through public hearings," said Consumer Advocate Liza Tucker.

The shutdown of Tesoro's Martinez facility, paired with the ExxonMobil's Torrance blast, affects 16.5% of California's refinery capacity, the group said.

As soon as workers began to strike, Tesoro announced it would shut down its Martinez facility completely rather than leave it partially running for routine maintenance and gas prices began to soar in a straight line, Consumer Watchdog said. That line spiked sharply again right after the Torrance explosion.

The price of gas tracks the price of crude oil, the group said. Crude has risen from a low of $45/bbl at the end of January to $50/bbl today.

However, the price of regular gas in California has risen more steeply than in the rest of the United States, where an average gallon of gas costs about $2.31/gal, it said.

"The state needs to ensure that refineries, making almost all our gas due to our special more environmentally-friendly blend, don't take advantage of consumers," said Tucker.

"They have every reason to try to raise gas prices by restricting supply and capitalizing on windfall profits while they can," she said.

OPIS reported earlier on Monday that it's been full steam ahead for Los Angeles retail gasoline prices over the past few days, which have climbed almost 20cts/gal since last week's explosion at ExxonMobil's 155,800-b/d L.A. area refinery located in Torrance, Calif.

The average price at the pump for regular CARB RFG gasoline in the L.A. area passed the $3/gal mark for the first time since early December this weekend, and is currently about $3.07/gal, according to www.Gasbuddy.com. Prices before the Torrance refinery incident were around $2.88/gal.

ExxonMobil's Torrance refinery in Southern California is facing a potential extended shutdown of its fluid catalytic cracking unit, following an explosion at the refinery last week.

This could keep the refinery running at only minimum rates for an extended period, reminiscent of Chevron's Richmond refinery operation and issues in 2012- 2013 due to a CDU fire at the Northern California facility. However, the Torrance refinery issue is expected to have a more significant impact on the California oil products cash market than Richmond's situation did due to the loss of the gasoline-making FCC unit at Torrance.

The Richmond refinery was forced to run at lower-than-normal rates for about a year, following the fire. However, it was able to feed vacuum gasoil to its FCC unit to produce gasoline even with a CDU off line. Chevron was seen selling bulk gasoline on the West Coast two weeks after that fire, helping to ease traders' gasoline supply concerns.

Unlike in Richmond, the Torrance refinery issue is expected to cause a squeeze in gasoline production and supply in the Los Angeles area as its FCC unit is shut and its CDU has limited downstream processing outlets. This impact could be more significant in the upcoming peak gasoline demand season.

OPIS notes that the niche West Coast products market has historically been susceptible to wild price swings due to a delicate balance between supply and demand.

Wholesale rack prices in Northern California were notably higher after Tesoro kept its Martinez refinery shut after a turnaround. Also, OPIS reported Tesoro and Valero were out of unbranded diesel supply at the San Francisco racks in the past few weeks.

February 19, 2015
Sunoco Boosts Q4 Fuel Sales to Affiliates, Third Parties;
Hikes Avg. Margins

Sunoco, a distributor of motor fuel to convenience stores, independent dealers, commercial customers and marketers, said on Thursday that its motor fuel gallons sold to affiliates during the fourth quarter increased 13% from a year ago to 304.9 million gallons.  

Gross profit on these gallons totaled $9.5 million, or 3.0cts/gal, versus $8.1 million, or 3cts/gal, in the same period a year ago.

Third-party customers included 738 independent dealers under long-term fuel supply agreements, 55 independently operated consignment locations and over 1,800 other commercial customers.  

Total gallons sold to third parties increased year-over-year by 65% to 241.5 million gallons.  

Gross profit on these gallons was $33.3 million, or 17.6cts/gal, compared to $7.6 million, or 5.2cts/gal, in the prior-year period.

Total gross profit for the latest quarter was $93.2 million, compared to $20 million in the fourth quarter of 2013.  

Key drivers of the gross profit increase were the MACS and Aloha acquisitions, organic growth in gallons sold and favorable fuel margins.

On a weighted average basis, fuel margin for all gallons sold increased to 13cts/gal, compared to 3.8cts/gal a year earlier.  

Sales of retail gallons, a change in the wholesale fuel customer mix and increased fuel margins resulting from declining crude oil prices drove most of the margin increase.

At Dec. 31, Sunooco operated 153 retail convenience stores and fuel outlets in Virginia, Hawaii, Tennessee, Maryland and Georgia.

Affiliate customers included 656 Stripes and Sac-N-Pac convenience stores operated by a subsidiary of its parent company, Energy Transfer Partners, as well as sales of motor fuel to ETP subsidiaries for resale under consignment arrangements at approximately 85 independently operated convenience stores.  

The partnership added 261 new contracted dealer sites in the fourth quarter, and six sites were discontinued for a total of 793 third-party dealers and consignment locations supplied by Sunoco as of Dec. 31.  

Of that total, 256 are attributable to the acquisitions of MACS and Aloha.

For the full year, Sunoco added a net of 287 contracted third-party dealer contracts, including 275 acquired sites, 30 organic additions and 18 discontinued sites.

Sunoco completed its acquisition of Honolulu-based Aloha on Dec. 16. Aloha is the largest independent gasoline marketer and one of the largest convenience store operators in Hawaii.  

The transaction included six fuel storage terminals and a wholesale fuel distribution network that markets to approximately 100 company- or dealer- operated stores.

The base purchase price was $240 million, subject to a post-closing earn-out, closing adjustments and before transaction expenses, and was funded under the company's revolving credit facility.

On Oct. 1, 2014, ETP completed its first planned retail marketing asset acquisition with the purchase of MACS for total consideration of approximately $768 million, subject to certain working capital adjustments.  

The consideration paid to ETP consisted of approximately 4 million newly issued Sunoco units and $556 million in cash.  

MACS consists of approximately 110 company-operated convenience stores and 200 dealer-operated and consignment sites in Virginia, Maryland, Tennessee and Georgia.

While primarily engaged in natural gas, natural gas liquids, crude oil and refined products transportation, ETP also operates a retail business with a network of more than 5,500 company- or independently-operated retail fuel outlets and convenience stores through its wholly owned subsidiaries, Sunoco, Inc. and Stripes LLC.

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