Fuel Management University

Headlines

November 18, 2009
Steeper Price Contango Pushes Up Offshore Distillate Storage to 85 Million BBL

The number of ocean-going vessels used for storing distillates has gradually risen in the past month to about 115 from about 98 a month ago, according to shipping sources on Wednesday.

The rise is in line with the steeper gasoil and heating oil price contango trends on ICE and NYMEX since October. Higher forward prices should encourage more players to store distillates in onshore tanks as well as onboard ships.

Based on the list of ships storing distillates, the estimated volume stored is around 11.38 million tons or 85.35 million bbl.

Offshore storage volumes are not included in official inventory data, such as the weekly data issued by the U.S. Energy Information Administration.

These ships are used to store heating oil, ULSD and jet fuel, but the bulk of the offshore storage is ULSD as it has a longer shelf life and a heftier carry profit.

The NYMEX front-month heating oil price spread was at minus 3.55cts/gal at presstime, and the January-February gap was at minus 2.46cts/gal.

ICE front-month gasoil spread was at about minus $10/ton or 3.17cts/gal, with the January-February gap at minus $8.25/ton.

This week, the ship booking activity for large range vessels to store distillates continues.

Two ships, Energy Centaur and Stena Poseidon, were chartered by BP in Ireland for jet fuel storage in the U.K. Continent.

Shell booked at least one ship for Russian gasoil delivery to the U.S.
Northeast with storage option. About three to four LR2 ships are expected to be used for storing heating oil off the coast of the U.S. Northeast in December.

So far, eight Very Large Crude Carriers are listed as floating storages.
Three of which are in Singapore, another three in the Mediterranean, and two are offshore West Africa.

Each VLCC could store up to 2 million bbl or 260,000 tons of distillates.

About 12 Suezmax tankers are booked for storage as of mid-November. Most of these 135,000-ton capacity ships are anchored in the Mediterranean.

Between 63-66 Large Range 2 clean tankers are booked with storage options.
Most of these 90,000-ton capacity ships are anchored off the coast of England, and some are in the Mediterranean and West Africa.

There are about 27-29 Large Range 1 clean tankers storing fuel in the U.K.

Continent and the Mediterranean. One or two of these 60,000-ton capacity ships are located in the Middle East and Brazil.

November 16, 2009
High Octane Gasoline Breeds High Octane Complaints from Marketers

Major oil companies continue to be ultra-competitive with their wholesale prices for unleaded regular. However, marketers say that several brands are pricing their higher octane grades more appropriately for the recession of 1980-1982 as opposed to the 2008-2009 malaise.

Take southeastern and Gulf Coast states, for example. Spot prices for the 93 octane grade in the Gulf Coast spot market has been stuck at 6-8cts gal over 87 octane regular for months. Offshore premium spreads have been just shy of 10cts gal for much of the same period. Yet, major oil companies including BP, Chevron, Citgo, ExxonMobil, and Shell have kept grade differentials for premium in the 25-27.5cts gal range this autumn.

Meanwhile, some states have seen aggressive unbranded chains bring the
overall differentials on the street down to less than what major brands command at wholesale. In Virginia, for example, the average pump price for premium is 23cts/gal over regular, or several cents below the spread that several brands charge at the rack. A branded retailer that could muddle along with, say, a
nickel rack-to-retail margin for regular, can't survive with that thin of a margin
for premium.

There is a similar squeeze on branded margins for midgrade. Major oil companies have typically charged 7.25-10cts/gal more for their 89 octane grade this fall, regardless of whether that product is purely conventional fuel or a mixture of 90% blendstock and 10% ethanol. In contrast, unbranded midgrade, whether through an outright rack purchase, or spot formulae deals, has typically been available for 4cts/gal over 87 blends.

Branded jobbers are particularly unhappy with the lofty 89 octane differentials. One southeastern jobber cited his own awareness of the octane boost that blending with 10% ethanol provides (thanks to the 114 octane number for alcohol), but admitted that he has little leverage with branded suppliers.

"I know they (the majors) have seen costs drop for midgrade, but that doesn't mean they have to charge me less," he commented.

Oddly, it's the places served by the cheapest source markets that have yielded the highest downstream differentials for high octane rack material. Whether one looks at CBOB, RBOB, or conventional gasoline, spot Gulf Coast traders have been reluctant to pay more than 6-8cts/gal above regular grade for months. Group 3 sourced material has seen spot premium around 6cts/gal over regular unleaded, and West Coast premium hasn't budged much beyond a 7cts/gal spread for CARBOB and 8cts/gal for Arizona blendstock. But it's rare to find a branded company charging more than 20cts/gal over 87 octane for a contract posting in any region except states supplied by the Gulf Coast.

Some Gulf Coast-supplied marketers thereby have a quandary. Those that have
negotiated branded gasoline on a Gulf Coast spot formulae basis can keep or
renew those deals and get prices for midgrade or unleaded gasoline that match
the most aggressive offerings among independents. But if they switch to formulae (available with some branded refiners), they risk paying a higher price on 87 octane regular. With some exceptions, branded postings for regular unleaded have consistently been less expensive than the formulae prices yielded in the first 10½ months of 2009.

Since unleaded regular is still the "fighting grade," there's not much enthusiasm for sourcing the high volume 87 grade to the more expensive methodology. This is particularly true since most marketers say that there has been no discernible growth in grade share for premium or midgrade this decade. Several believe that the millions of dollars spent on costly additives or advertising campaigns has merely arrested the decline.

November 10, 2009
New York Cash Gasoline Sees Slight Contango Price Trend

The cash gasoline market in the New York Harbor is in a slight contango
on Tuesday, reflecting the seasonally bearish gasoline price trend heading
into Winter.

Prompt F5 RBOB was valued at 2.5cts under the screen, and prompt M5 conventional regular was 50pts under. Both values were stable or slightly stronger than the previous day.

The F5 market has a slight carry of 35-40pts from prompt delivery to the end of the month, while the prompt M5 market is about even to 15pts stronger than any November delivery.

The market consensus is that New York Harbor is not facing any supply shortage now or in the coming weeks.

This is evident in the closed European arbitrage window for the past two weeks.

"New York Harbor does not need the gasoline," a European trader said.

Irving Oil's St. John refinery and Hovensa's St. Croix plant are expected to return to normal rates this week.

Also, the gasoline deliveries on Colonial Pipeline have been allocated for the seventh consecutive cycle on Tuesday. Gasoline nominations are allocated from Cycle 58 to 65.

Gulf Coast gasoline cash price differential has been mostly stable, keeping the arbitrage window open especially if New York Harbor price contango widens.

On the flip side, Valero is expected to cut rates significantly at its Delaware
and Paulsboro refineries later in the fourth quarter. Paulsboro will idle for
three weeks.

Sunoco's Eagle Point refinery has also shut indefinitely since early last week.

"They (restarts and rate cuts) may cancel each other out," a second trader said.

Meanwhile, in Europe, the market sentiment remains bearish in the longer term despite the closed arbitrage window.

The natural and main export market for European gasoline is the U.S.

"The storage tanks will fill up quickly over here, and the price structure will collapse eventually," a second European trader said.

Incremental gasoline barrels should continue to arrive in the U.S. in early November due to a previously open arbitrage window, but flow should slow towards the middle of the month.

Gasoline imports for the week ended Oct. 30 soared to 1.077 million bbl from 600,000-700,000 b/d in the previous three weeks.

For distillates, prompt heating oil was a nickel under, and LSD was at
4.75cts under.

Prompt ULSD was at 4cts under, and prompt jet was valued at 2cts under. Kerosene was at 3cts over.

November 2, 2009
Flattening Conway Propane Forwards Curve Reflects Winter,
AG Demand

The spread between October and January propane prices in Conway narrowed substantially in October as the winter heating season got off to good start with an early blast of cold weather. Also helping are been expectations that the Midwest is likely to see strong demand for propane for drying a very wet and delayed corn harvest.

On Oct. 1, January 2010 propane prices were running 5.75cts/gal over October prices. Over the month, that spread narrowed a little more than 4cts/gal and yesterday, January prices were holding only a 1.625ct/gal premium to October. That contraction shows a significant shift in mind-set among traders as the nation started to really get into the winter heating season.

As the winter heating season opened on Oct. 1, the Kansas markets were so flush with propane that traders were wondering where they would put all the barrels. The lack of storage was putting pressure on October prices, and wet barrels, barrels for immediate delivery, were running at a discount to the anys. Meanwhile, January prices were holding strength comparatively. The cost of storing barrels was supporting the nearly 6ct/gal January premium.

But, as October wore on and cold weather hit, the tight storage situation began loosening. Dealers started pulling product to make deliveries to retail customers who were firing up the home heaters, noted one trader.

One Conway trader says a flattening of the Conway propane forwards curve is a bullish sign for the market, especially in the front months. By January, the market should be in backwardation, meaning prices for February and March should be cheaper than January. Forwards curves are already showing that pattern for January through March.

"As you get more demand in front months, the contango is going to lessen,"
the trader says. In that regard, he would not expect that January would not continue to trade at much of premium to October or November due to the demand in the current months. "You are seeing the front months trade higher than out months," the trader says.

An equally bullish sign is that Conway propane is trading closer to Mont Belvieu propane prices, which is usually the higher priced market. The trader says the main drivers of the Conway trade -- crop drying and home heating -- both look ready to draw down more inventory. The crop drying season, which is usually over in October, is not likely to finish until the end of November.
That's because the corn crop is particularly wet.

Indeed, more than two-thirds of the corn crop remains to be harvested and the moisture content is so high that almost the entire crop will likely need to be dried.

Moreover, an early fall cold spell bodes well for home heating demand. "With cold weather and crop drying, you could see some good demand in November and December," the trader says.

How strong will the demand be? That's hard to measure, but one trader says he believes that propane firms will more than exhaust the amount of propane they allocate for crop drying. Another says that he expects even the propane dealers who have pre-purchased propane will be back in the market for more.

October 27, 2009
Weaker Contango, Margin Rise Discouraging U.S. Floating Crude Storage Play

The number of floating crude storage vessels in the U.S. Gulf has dropped to about five to eight from 15 in summer due to a weaker contango and a refining margin rebound, crude traders told OPIS on Tuesday.

However, the number of Very Large Crude Carriers used for crude and distillates storage around the world remained mostly stable at about 40-45 over the past several months, with some discharging and some new storages seen.

The bulk of the VLCCs was used for crude storage, and less than 10 for distillates. These offshore storage vessels are not included in the Energy Information Administration's weekly or monthly inventory data.

It is noted there could be up to 10-15 VLCCs in the U.S. Gulf and the Caribbean. Some of which are waiting to pick up crude or fuel oil cargos.
There is no VLCC storing distillates in this region.

Late last week and early last week, Vitol was seen booking three VLCCs for unsold, cheap West African crude loadings on Nov. 13-25. These ship charters include storage options.

A VLCC has a capacity to hold about 2 million bbl of crude.

Shipping sources said there are more unsold West African crude cargos looking
for homes.

The scheduled indefinite shutdown of Sunoco's 152,000-b/d Eagle Point refinery contributed to the bearish West African heavy crude spot market. The refinery is expected to shut in November due to poor economics and a plan to optimize refining operations.

The drop in number of floating storage vessels in the U.S. Gulf was attributed to the weaker price contango trend on the NYMEX.

NYMEX intermonth contango crude spread was at minus 40-60cts/bbl, which traders said could be a breakeven point. Also, the VLCC rates were flat to slightly stronger since July. The intermonth contango spreads were more than a $1/bbl in summer.

The average VLCC rates for a Middle East-U.S. Gulf Coast voyage were at World Scale 26 versus WS 27 in July, while rates for a West Africa-U.S. Gulf Coast voyage was up WS 6 from July to WS 46.

Some large refiners, which adhere to the Last In, First Out accounting system, are trimming down their crude inventories.

Refiners are accountable for crude inventories in offshore vessels as they appear on their trading books.

"Refining margins are also better than they were a few months ago, so those who had cut crude runs are now trying to kick things up a bit," a trader said.

Despite fewer ships storing crude in the U.S. Gulf, the onshore storage inventory should have fallen or leveled off last week due to higher refinery utilization rates.

This blip is not expected to last.

In November, Cushing inventory should resume its climb, with more arbitrage barrels set to arrive on the U.S. Gulf Coast from West Africa.

Firmer freight rates could also push storage players to discharge their cargos into Cushing.

Crude stocks at Cushing, Okla., edged higher for two consecutive weeks. Last week, crude stocks were pegged at 26.004 million bbl.

Crude inventory at Cushing soared to a record high in recent memory of
33.606 million bbl for the week ended Aug. 7, but it started to fall gradually over the next several weeks to as low as 25.124 million bbl in less than two months, according to the EIA.