March 28, 2017

Futures Rise Across the Board; Gasoline Ready for Take-Off

Petroleum futures posted solid gains today, and indeed there are signs that only a disappointment from EIA tomorrow could derail what may be a seasonal run higher in gasoline that could pull crude up as well. Nothing spectacular has been witnessed for futures quotes, but cash markets have quietly flexed some muscles in a couple of regions where refinery downtime is significant.

Crude oil prices moved higher despite a gain of more than 0.5% in the U.S. dollar, which might promote some oil selling under normal circumstances. There was trader optimism that any stock build tomorrow will be limited, and crude also benefited from delays in some export loadings out of Libya. May WTI saw moderate volume throughout the day with modest selling on the close that limited the contract to a 64cts/bbl increase, putting it at $48.37/bbl. The May Brent number was last quoted at $51.30/bbl, up 55cts/bbl on the day.

RBOB for April rose 1.6cts/gal to $1.6349/gal with May futures inching up 1.01cts/gal to $1.6364/gal. But once again, there were some more spectacular gains in a few cash markets. The red hot Pacific Northwest tracked all the way up to more than $1.85/gal, giving able refiners there a gas crack of as much as $28/bbl versus local crude. East of the Rockies spot gasoline generally rose 2- 2.6cts/gal while California saw more modest 1.5ct/gal increases. There is a lot of nervousness about California, however, given the major turnaround that will begin next week at the storied Torrance refinery.

A nationwide gasoline stock draw is expected tomorrow and indeed, bulls in gasoline don't have any excuses for a strong finish to March and strong beginning for April. Consumer confidence numbers released today were as high as they've been in 16 years and there were no horrible weather issues last week to curb a spring demand spree.

Ethanol prices also rose on a day when most U.S. assets were bid higher. Near- term ethanol prices were up 1.7-1.8cts/gal.

Diesel was quiet, but there are some who believe that long-term buyers may rue a missed opportunity to buy some diesel at less than $1.50/gal. Today saw April and May ULSD futures settle at $1.5167/gal and $1.5201/gal, reflecting gains of 1.42cts/gal and 1.16cts/gal.

March 22, 2017

Spring Clearance Sales for Rack Gasoline Continue

Refiners and other suppliers can't get too excited about today's solid but unspectacular drop in gasoline stocks of 2.8 million bbl. Instead, many are worried that higher refinery runs will push gasoline production regularly above 10 million b/d this spring and summer and perpetuate difficulties in "clearing" product at downstream terminals.

A glance today at the more than 350 racks that OPIS follows underscores the issue. Suppliers are resorting to some aggressive discounts in order to move product and make way for rising refinery output. Not helping matters is a slowdown in exports, with less than 600,000 b/d of gasoline leaving the country in previous weeks. (Gasoline exports topped 1 million b/d earlier in the winter).

The most aggressive "clearance sales" continue to show up in Illinois, Indiana, Michigan and Ohio. Terminals like Des Plaines, Forestview, Lemont and Mt. Prospect all saw double-digit discounts off OPIS Low for the cheapest unbranded product today, pushing E10 prices to about $1.45/gal. Indiana was appreciably cheaper with gasoline in Hammond at just $1.372/gal and Indianapolis motor fuel moving at $1.37/gal. In both cases, suppliers had to beat the OPIS Low by about 5cts/gal.

Most Detroit marketers saw rack prices in the high $1.40s, but OPIS confirmed both branded and unbranded gasoline moving for discounts of 7.78-10.18cts/gal in the Motor City. That resulted in a gasoline value of just over $1.38/gal even before today's dip in RBOB futures.

St. Louis was also a sore spot, with a 7.03ct/gal discount to OPIS Low putting the net price around $1.388/gal. And in Ohio, spring has clearly not "sprung" for gasoline demand, with widespread discounting in Cincinnati and Columbus pushing E10 prices below $1.40/gal.

There are even some cracks in Pacific Northwestern rack markets, even though the spot market there has spent much of March between $1.75/gal and $1.80/gal for suboctane blendstock. Today found E10 racks in Anacortes, Seattle and Tacoma all slipping below $1.39/gal.

The clearance sales also cross over into ethanol availability. Spot prices for Chicago ethanol have remained largely in the $1.48-$1.50/gal range this month, but cracks are seen closer to the plants. One could easily find ethanol for anywhere from $1.44-$1.49/gal in South Dakota today with discounts as high as 10-14cts/gal. Omaha had actual postings at the $1.40/gal level and Des Moines was a couple of cents under Chicago spot quotes.

March 15, 2017

Wolverine Pipe Line Begins Oil Products Delivery to Detroit from Chicago

Wolverine Pipe Line Company said on Wednesday its new Detroit Metro Access Pipeline (DMAP) is now in service, allowing Wolverine to make its first commercial delivery of refined oil products from the Chicago area to consumers in Metropolitan Detroit on March 6.

The approximately 34 miles of 16-inch diameter pipeline is connected to an existing Wolverine line.

Construction of the DMAP was completed in January and final pre-operational testing was conducted last month. The final phase of DMAP, restoration of the right-of-way, will be done this spring. Wolverine said it is committed to restoring landowners' property in accordance with the agreement reached with individual landowners.  

Wolverine's newly constructed pipeline runs from Schneider Road in Washtenaw County's Freedom Township to its Detroit Metro Station in Romulus. At Romulus, the pipeline connects to an existing Wolverine line that continues to Woodhaven in Southwestern Metropolitan Detroit.

With the new DMAP, Wolverine now has nearly 700 miles of pipeline in active service and can now transport up to 90,000 b/d of gasoline and diesel fuel products from the Chicago area to Metropolitan Detroit. The pipeline was designed to meet or exceed all applicable federal and state regulatory requirements.

"There is a demand for additional gasoline and diesel fuel in the Detroit metropolitan area," said Wolverine Pipe Line Company President Saul Flota. "The Detroit Metro Access Pipeline connects to our existing pipeline so we can bring gasoline products into southeast Michigan from refineries in the Chicago market."

Wolverine said that the new pipeline provides benefits to the state of Michigan that include 250 to 300 construction jobs. As part of their agreement, general contractor Minnesota Limited built the pipeline with union labor, with approximately 45% of the workers sourced from local halls. Other pipeline work was done by specialized labor.

The new pipeline also created four to six new permanent jobs at Wolverine, and workers spent approximately $4 million locally for fuel, materials, lodging and food during the planning and construction of the pipeline.

It will be providing an estimated $100,000 in local tax revenues and approximately $1.2 million in income taxes annually for the state of Michigan.

Wolverine is a Michigan-based pipeline transportation service company incorporated in 1952, and is headquartered in Portage. Wolverine has 67 employees in three states where it operates -- Michigan, Indiana and Illinois.

Wolverine operates nearly 700 miles of active pipelines connecting refineries in Joliet and Lemont, Ill., and Hammond, Ind., to terminals in Illinois, Indiana and Michigan, including the new reconnection to Woodhaven in Southwestern Metropolitan Detroit. Wolverine transports more than 35% of all gasoline and diesel fuel products used in Michigan.

March 10, 2017

Oversupplied US Mogas Market on Track to Normalization on Stocks Fall: Bank

The oversupplied U.S. gasoline market is on track to normalization in May/June as predicted earlier by Barclays Capital, the bank said on Friday.

"Over the last four weeks, we believe the EIA's weekly data, as well as additional disclosures from the oil companies on y/y same-store sales in Jan-Feb and 1Q throughput, have further confirmed our view that the tide is turning," Barclays said.

A month ago, in its Feb. 13 report "Is Gasoline Doomed Again in 2017?" the bank asked if there were a reasonable path for the U.S. gasoline market to return to a normal inventory level before the summer driving season, without economic run cuts. Barclay's short answer then was "yes," based on an in-depth analysis of its new U.S. light product supply/demand model.

Since late January, gasoline inventory has declined by 7.8 million bbl, reflecting a sequential drop in the utilization rate of 4.2% in February, the bank said. This compares to a historical five-year average drop of only 5.1 million bbl. Also, despite warmer weather than even 2016, distillate inventories have declined in line with the historical trend line.

"We reiterate our Positive sector view and think now is the time to buy, in light of the market's continued skepticism. Historically, after reaching the inflection point in the inventory trend, product margins could take two to four weeks before responding to the changing fundamentals, while shares also often modestly lag the margin trend. The market appears to be following the same playbook here," the bank said.

The latest four-week average gasoline crack is slightly below its four-week average from a month ago, despite the improving fundamentals, Barclays said. However, margins have started marching higher in response to stronger fundamentals in the last few days.

Meanwhile, the bank said that U.S. oil refiner shares have still been essentially flat since mid-February (versus mostly single-digit declines in other energy sub-sectors and a flat S&P).

Barclays continues to expect gasoline inventories to reach a normal seasonally adjusted level by May/June without economic run cuts, while exiting the year at 227 million bbl versus the bank's previous estimate of 228 million bbl and the five-year average of 234 million bbl.

The bank expects distillate inventories to drop below last year's level by the end of March and to exit the year at 196 million bbl, in line with its previous estimate.

The official U.S. data issued by the Energy Information Administration is supporting the bank's prediction so far, Barclays said. The U.S. refinery utilization rate has dropped to 84%-86% over the last four weeks from 90% in January, in line with Barclays' previously forecast 85% average for February and March, the bank said.

Gasoline inventories dropped to about 249 million bbl from the bank's estimated January exit level of 257 million bbl. "We had expected February to exit at 250 million bbl," the bank said.

Distillate inventories dropped to 206 million bbl from its estimated January exit level of 212 million bbl. "We had expected February to exit at 204 million bbl," it said.

March 9, 2017

Rising Midwest Refining Capacity Reduces Reliance on Gulf Coast Supply: EIA

The rise of cheap crude-oil supply has boosted refining capacity and production in the Midwest and Rocky Mountains in the last decade, lessening the regions' dependency on inbound transportation-fuel shipments from the U.S. Gulf Coast, a study commissioned by the U.S. Energy Information Administration (EIA) shows.

According to the study, which examines the two Petroleum Administration for Defense Districts (PADD), greater self-sufficiency in PADD 2 (U.S. Midwest) and PADD 4 (Rocky Mountains) has enhanced the security and flexibility of fuel- supply chains in the two regions.

The study, published on Wednesday, was compiled by ICF LLC, a Virginia-based consultant, on EIA's behalf.

From 2005 to 2015, refining capacity increased by 323,000 b/d, or 9%, in PADD 2, and was up by 63,000 b/d, or 11%, in PADD 4, mostly driven by the regions' proximity to cheap supply from U.S. shale oil and Alberta oil sands in Canada, the study shows.

Meanwhile, in-region refinery production as a percentage of transportation-fuel consumption (net of ethanol and biodiesel inputs) has grown by 84% in PADD 2 and 101% in PADD 4, compared to 69% and 97%, respectively, in 2005.

The study attributed the trend to stagnant demand for transportation fuel in PADD 2 (but has grown in PADD 4) and increasing volumes of renewable fuels added to the supply mix.

"Increased refinery production has allowed refiners in PADDs 2 and 4 to meet a greater share of local demand. At the same time, PADDs 2 and 4 have reduced inbound shipments of transportation fuels by pipeline and barge from refineries in Texas and Louisiana in PADD 3 (Gulf Coast)," according to the study.

The study adds that higher in-region output combined with flat demand has allowed PADDs 2 and 4 refiners to expand markets for their products in the adjacent parts of the East Coast (PADD 1), West Coast (PADD 5) and even PADD 3 into the Gulf Coast, if necessary.

Despite decreased product movements between PADD 3 and PADD 2, many of the pipeline and waterborne supply systems that facilitated these movements remain in place and can be used to provide swing supply into PADD 2 to compensate for outages at in-region refineries, according to the study.

For example, when a series of planned and unplanned refinery outages affected PADD 2 production in the second half of 2015, shippers responded by increasing shipments by pipeline and barge from PADD 3 to PADD 2 by as much as 276,000 b/d.

Supply chains in PADDs 2 and 4 are also strengthened by a hub-and-spoke configuration of pipeline systems in the regions. These pipeline networks connect geographically dispersed refineries and downstream markets in PADDs 2 and 4 through multiple, often redundant, small-diameter pipelines.

"This configuration provides suppliers with the flexibility to shift supplies between supply and demand centers to compensate for outages," the study said.

Despite this flexibility, supply chains in PADDs 2 and 4 often cover long distances, and shifting supply to relatively isolated markets in PADDs 2 and 4 can often take considerable time, it said.

A complete copy of the 151-page study can be accessed here.

March 6, 2017

U.S. Refiners Face Dilemma of 'Penny Wise Now, Pound Foolish Later': BAML

U.S. refiners should be cautious not to repeat last year's mistake in raising production now only to add to already-high inventories later, as refiners' profitability is expected to decrease in 2017, according to Bank of America Merrill Lynch (BAML).

In a research note, BAML energy analysts said that healthy refining margins in 2016 sent crude runs to new highs in the Atlantic Basin. While spot margins may find support on peak maintenance for a few more weeks, forward margins should ease up the second quarter and second half of 2017.

This is because as the global oil market continues to rebalance, the term structure of Brent crude futures should move into full backwardation, keeping margins under pressure.

"In simple terms, we believe upstream tightness will keep downstream margins in check," the bank said. 

A combination of ample stocks, elevated output, structural demand decline and a policy proposal to change the U.S. Renewable Fuel Standard (RFS) mandate program should weaken refining margins despite tightened crude oil markets, it said.

As a result, refiners have to decide if running at full rates now will spark longer-term weakness because of excessive refined product inventories, BAML said.

"They face a big dilemma: be penny wise now and possibly look pound foolish later, essentially run harder now and suffer in six months, or run softer now and forego profits," it said.

BAML said that refiners' margins could come under additional pressure, as additions to global crude distillate capacity are set to grow at the strongest rates in eight years, at 1 million b/d, due to earlier-than-expected startups in China and faster ramp-ups.

The bank also noted that supply disruptions in major Latin America nations such as Mexico have been one of the most constructive factors for refined product cracks, especially for gasoline. BAML said that U.S. gasoline imports into Mexico have surged to 425,000 b/d in the fourth quarter of 2016, up from 285,000 b/d in year-ago quarter.

However, the trend should start to reverse as run rates in Mexico and Brazil are expected to improve. That, combined with more moderate growth in product consumption, should result in a considerably lower import pull from emerging markets, BAML said.

On the other hand, the bank said global fundamentals look more balanced for gasoline than for diesel, but both remain oversupplied.

BAML is lowering its average 2017 Eurobob Brent crack to $9/bbl from $10.25/bbl previously. It is sticking to its "below-market forecast" for gasoil cracks of $10/bbl for the year.

February 16, 2017

ExxonMobil to Expand Lubricants Production at Singapore Refinery

ExxonMobil said on Thursday that it will expand its Singapore refinery to support the production of the company's proprietary EHC Group II base stocks.

The company said that the lubricants production expansion will strengthen the global supply of these products and enhance the Singapore facility's competitiveness. Construction is expected to begin during the second quarter of 2017 with completion anticipated in 2019.

ExxonMobil's EHC product line has been designed to maximize the performance of all major automotive engine oil grades and to enhance the performance of finished lubricants used in multiple industries, the company said.

"Our new investment in Group II base stocks will enable our customers to blend lubricants that satisfy more stringent specifications, help reduce emissions, and improve fuel economy and low-temperature performance," said Ted Walko, global basestock and specialties marketing manager. "This project, combined with the company's construction of a hydrocracker unit currently underway in Rotterdam, demonstrates ExxonMobil's commitment to delivering value to our customers through industry-leading, globally consistent base stock quality and supply reliability."

The expansion project in Singapore represents the latest in a series of recent ExxonMobil investments in base stock production, including a previous expansion of capacity at the Singapore refinery in 2014, a recently commissioned project at the company's major integrated facility in Baytown, Texas, and introduction of Group II base stocks into European markets ahead of the anticipated completion of the new Rotterdam hydrocracker unit in 2018, ExxonMobil said.

Work also continues on a previously announced cogeneration project at the Singapore refinery, expected to be completed by the end of 2017, which will improve the facility's energy efficiency and reduce emissions, the company said.

ExxonMobil is one of Singapore's largest foreign manufacturing investors with over S$20 billion in fixed assets investments, according to the company. Its Singapore affiliate, ExxonMobil Asia Pacific Pte Ltd, (EMAPPL) has manufacturing facilities which include refinery operations in Jurong and a world-scale petrochemical plant on Jurong Island.

EMAPPL has a network of gasoline retail stations under the Esso brand and is a supplier of cylinder cooking gas. EMAPPL also serves the commercial market with its industrial, aviation and marine fuels and lubricants.

February 13, 2017

Pemex Logistica Open Season for N. Mexico Seen Extended: Consultant

Open season for the use of state-owned oil logistics assets in northern Mexico is seen taking longer than originally envisioned, cross-border business consultant Mario Guido told OPIS on Monday.

The most recent date for pre-qualified independent gasoline and diesel marketers to submit proposals for Pemex's pipelines and terminals that they want to book was Feb. 17, but Mexico's Comision Reguladora de Energia (CRE) has decided that more time is needed, according to Guido, partner at Strategic Business Development. No new dates for bid and assignment have been offered, he said.

The move likely means that companies won't receive allocated capacities until sometime in March. The delay in assignments may spur some of the first companies to obtain 12-month import permits in April 2016 to reapply or to seek extensions.

Fuel distributors and retailers who have been considering the terms offered by Pemex Logistica for use of its transportation also got some clarity regarding loss of product in Pemex pipelines. Company Director Roberto Revilla Ostos stated recently that the company will not cover any loss of product put into its transportation system which does not arrive at its destination. The company will be liable only for the fee applied to transport the missing product, he said.

As reported by OPIS in January, in the first phase of the open seasons Pemex will make available about 267,000 b/d of pipeline capacity and around 959,000 bbl in storage capacity in northern Mexico. In accordance with the schedule of gasoline and diesel price flexibility to be established by CRE, the open seasons will be carried out by region.

The first phase will be in the northern zone of the country, and will include storage terminals and pipeline systems in the border states of Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas.

Meanwhile, Mexico's liberalization of gasoline and diesel prices continues.

The government opted not to follow a Jan. 1 increase of 14% to 20% in retail prices with further upward adjustments for the first and second weeks of February, in response to intense public and political condemnation and partly thanks to the lower cost of imported supply (due to weaker U.S. prices and strength in the peso).

However, another small price rise is possible beginning Feb. 18. At that time, the government can adjust ceiling prices daily in line with international market prices for phased-in deregulation.

Movement in the fiscal stimulus offered to fuel marketers by the federal government has allowed it to keep retail prices unchanged from January. And should international pricing and exchange rates work to raise Mexico's cost of supply, the country's finance ministry (SHCP) has indicated its willingness to postpone spending on large projects -- such as a highway planned for Queretaro - - so that the funds go toward the fiscal stimulus to limit retail fuel increases.

That fiscal stimulus -- the refundable difference between what marketers spend for Pemex supply and the lowest allowable retail price at which they can sell -- remains a contentious issue for retailers because claiming it carries with it the onus of financing the refund for some 45 days.

According to Guido, for a station that typically sells 11 million liters in a month, that financing can run at upwards of US$1.5 million.

Marketers have to wait for the end of the calendar month to apply for the refund and meet criteria such as volumetric system data showing that all the fuel purchased was sold to customers and attestation by legal representatives of that data. They have been promised a 13-day turnaround of those applications.

For marketers along the northern border, Feb. 14 will be the first test of the government's guarantee to refund their financial outlay of the 3.27 pesos/liter stimulus in play during January.