Monitoring U.S. Finished Petroleum Products Exports – an Indicator for Shipping
Exports of finished refined products have trebled since the beginning of 2006. For example, from 1981 through 2005, the monthly exports of finished petroleum products were relatively constant and averaged 721,000 barrels a day. From 2006 through April 2016, the last 10 years, monthly exports of finished petroleum products rose dramatically and averaged 2,131,000 barrels daily, or treble the previous average monthly exports that existed for the previous 25 years. Recent data suggests that the refined product export capability may be near capacity as refined product exports for the last 16 months (including the first four months of 2016) have been relatively constant, averaging 2,806,000 barrels a day.
During the earlier era, 1981-2005, the dominant refined petroleum products exported were the heavier end-products produced by the gasoline conversion process, viz., residual fuels and petroleum coke. From 2005 through today, the primary products exported have changed and now includes a broad range of finished refined petroleum products, ranked in order, that include distillate fuels, petroleum coke, residual fuels, and motor gasoline. See Figure 1.
The source of this significant jump in the export of refined products is the success of applying an enhanced recovery technique, hydraulic fracturing, to shale reservoirs that unlocked both oil and gas that was not available under other conventional oil recovery processes. This technique was so successful that in five years U.S. oil production almost doubled; from about 5 million barrels daily during the 2006-2008 period to just under 10 million barrels daily in 2015 (9.6 MMBD during April 2015). This is a magnificent feat of engineering and mining skill. See Figures 2 and 3.
However, since the vast majority of this new production was characterized as “light-sweet” crude oil, it rapidly became surplus to the requirements of the indigenous U.S. refining industry who over the years refiners made significant capital investments in refining hardware to process crude oils characterized as “heavy-sour” types. The increased shale oil production quickly resulted in a surplus of light-sweet crude oil in the U.S. that under existing legislation could not be generally exported. As a result, rising U.S. oil production became “stranded.”
The alternatives available to oil producers included exporting crude oil to Canada for use in that country, which was permitted under existing legislation, or export refined products, which had no restriction. In either case oil producers faced two options, viz., shutting-in production or subsidize transport. Since shutting-in production is an anathema to oil producers, the only alternative was to subsidize transport to ensure both off-take and uninterrupted cash flow. To implement this subsidy, oil producers offered discounts to the oil price. This benefitted refiners, both in Canada and the U.S. as the opportunity to purchase crude oil at a price that ultimately resulted in a very positive refining margin. As a result, the U.S. refining industry increased purchases of additional crude oil above the level necessary to meet indigenous refined product demand and exported the surplus. The price discounts also enticed Canadian refiners, predominantly located in the Maritime Provinces as well as the metropolitan area of the city of Quebec to also purchase U.S. crude oils which provided a secure outlet for the rising U.S. oil production.
Implications for Shipping
The expansion of the range of oil products offered for export provides opportunity for either clean or dirty oil tankers to now load outbound cargos from the same or nearby U.S. port from which an inbound cargo of imported refined products just completed discharge. These opportunities can arise at the major oil ports located throughout the country, such as Corpus Christi, Houston, Texas City, Port Arthur, New Orleans, and Pascagoula on the Gulf Coast; Philadelphia and New York on the Atlantic Coast; and Los Angeles, San Francisco, and Seattle/Tacoma on the West Coast. From an industry viewpoint, such an opportunity improves both operational efficiency and company profitability.
Indications of Opportunity
A primary indication for an opportunity to engage in re-loading refined products at major oil ports in the U.S. from which an imported cargo of refined products was just discharged can be achieved by monitoring the implied refining margin available to the industry, which is generally referred to as the “crack spread.” The crack spread (also referred to as the 3-2-1) represents the ratio of the component parts of the refining process. This structure suggests that the implied industry refining yield is represented by three barrels of crude oil from which is manufactured the average industry yield of refined products, or two barrels of motor gasoline and one barrel of distillate fuels. This is represented mathematically by [(0.67 x’s the price of motor gasoline + 0.33 x’s the price of heating oil) – the price of WTI crude oil] = a reasonable representation of the refining industry’s gross margin or the “crack spread.” 1 This is displayed by Figure 4.
What are the waterborne shipping implications regarding the export capability of refined petroleum products?
- Refiner Margin > $8-$10/Bbl suggests refining profitable – supply of refined products is above U.S. demand with difference exported
- $6 < Refiner Margin < $8/Bbl suggests stress on the refining system – meet U.S. demand with limited exports
- Refiner Margin ≈ $5/Bbl is about breakeven with cash operating costs – minimum exports; continued operation of high cost refineries is questionable
For the last 24 months (from mid-2014), crude oil has been surplus throughout the world and the price has dropped by a little more than 50%; from $100 a barrel to about $45-$50 a barrel where it is trading today. In addition, Congress repealed the restrictions associated with exporting domestic crude oil production. As a result, it is no longer necessary to refine surplus crude oil in order to export the resultant refined products; crude oil can now be directly exported and this is occurring. This is also manifest by the refining margin hovering slightly above and below $10 a barrel during the previous 12 calendar months and is well below the margins available during the period when crude oil was “stranded” (2013-2015).
However, since worldwide crude oil supply remains currently surplus, the world market price reflects this oversupply implied discount. As U.S. oil production continues to decline and supply approaches balance with demand, the crude oil price will increase to reflect this movement toward balance. The key question then becomes the supply-demand balance for refined products. If the recent increase in U.S. exports of refined products are supported by demand and not a function of the discounted U.S. oil price, i.e., the refined product export price from the U.S. is indeed representative of the world price, then the U.S. refiners have created a niche market and world oil prices should support the continued supply of refined product exports from the U.S. If not, then the Crack Spread will compress, refiner margins will be squeezed, and high cost inefficient refining facilities will close.
The export of a wide range of refined petroleum products from the U.S. is a fairly recent phenomenon. Whether or not this new market for U.S. manufactured refined products can be sustained has yet to be finally determined. U.S. oil production has declined by 700,000 barrels a day or about 7% between the peak of U.S. oil production that occurred during April 2015 and April 2016. The Energy Information Administration forecasts a decline in U.S. oil production of 1.6 million barrels a day by the end of 2017. To meet the EIA forecast suggests that the rate of decline will be slightly increasing going forward. As oil production declines, upward pressure will be placed on crude oil prices. The question then becomes will refined product prices increase at the same percentage rate as crude oil prices thus preserving the refiner margin or will the margin compress? This is the key question and only time will tell.
(1) Ensure appropriate conversion factors are included in the equation to balance the units of measure utilized for expressing the price of these commodities. There are 42 U.S. gallons in a barrel of oil.
- Date October 12, 2016
- Tags October 2016