Strong US gasoline imports may signal softer summer demand
The start of summer in the US traditionally marks the start of the driving season, a period of strong gasoline consumption for the US and a major driver of European exports. However, high imports from Europe since mid-March and high refinery utilization rates could put early pressure on the arbitrage window to the US.
Having clocked up 1.58 trillion miles in the first half of 2017, US driving has been increasing for six straight years, according the US Department of Transportation’s Federal Highway Administration.
Due to restrictions applied by the Jones Act — which require trade flows of oil and other goods between US ports to be carried by US-flagged, US-built and US-crewed ships — the US Atlantic Coast is largely relying on imports from abroad in the lead-up and during this high demand period.
US East Coast (PADD I) gasoline stocks increased by 1.84 million barrels to 63.9 million barrels in the week ending May 4, according to the Energy Information Administration (EIA).
Stocks on the East Coast have been trending higher since late March, defying the overall trend of gasoline inventories across the US moving lower. With the US heading into the summer driving season, the question is how much higher can inventories go before they start affecting demand.
US gasoline demand is currently the main driver of European exports in what sources describe as an otherwise very quiet market. Gasoline flows from Northwest Europe scheduled to arrive in the US and on the east coast of Canada amount to around 1,274,000 mt so far in May, according to data Monday from S&P Global Platts trade flow software cFlow.
While these overall volumes are in line with volumes seen in March and April, an increasing number of tankers on a trans-Atlantic journey in May are observed to be bound for discharge in New York.
While PADD I gasoline stocks have been rising ahead of the driving season and the switch to summer specification gasoline on May 1 for the past two years, they are doing so much earlier and stronger this year.
PADD I stocks have risen by about 7.55 million barrels since mid-March whereas in the last two years stocks have only started to pick up in mid-April. However, it should be of note that East Coast stocks were comparatively lower than in the previous years prior to the increase starting March.
Refinery utilization rates have risen again as well and stood at 94.9% in the week ending May 4, 3.8% higher year on year and the highest recorded for May in the past three years, according to the latest EIA data.
DEMAND GOING FORWARD
According to the latest data released May 8, the EIA sees US gasoline consumption for 2018 stable on the past two years at 9.32 million barrels.
Sentiment on that figure remains mixed, however, as prices at the pump have jumped due to a higher flat price and are estimated to average $2.97/gal in June, $2.95/gal in July and $2.92/gal in August, according to the EIA. These prices are near the $3.00/gal marker, commonly perceived as the threshold over which one can expect adverse effects on demand.
On the back of recently strong imports, seemingly no significant increase in consumption and with refineries already in full gear, sentiment is mixed on how the situation will develop.
“Refinery utilization at PADD I is already at max,” said a source, adding that while the refinery arb is open up until the third quarter, exports ultimately depend on “how weak the European market is.”
Other sources, however, have a more bearish view. “Fundamentals in the US don’t look strong. [The trans-Atlantic] arb was locked in a while back, which is why ships keep coming in, but over the summer they will become less unless refining margins [go] up,” the source said.