It’s essential for a daily fixture of life in the United States — a morning commute for many working Americans — and for transportation of basic goods in the US.
The US is dependent on gasoline for nearly every aspect of transportation, but the hard reality for the country’s drivers is that its refiners don’t produce near enough to meet demand. Government data shows we now consume about 9.3 million b/d of gasoline nationwide. To offset the shortfall, the US imports about 710,000 b/d of gasoline — more than two cargo ships per day.
But new environmental rules that took effect at the beginning of the year may encourage US refiners to send additional gasoline outside the United States. In addition, many European refiners who send their excess gasoline to the US may instead be sending additional product to West Africa and Latin America.
The US government now requires finished gasoline to average 10 ppm sulfur, from the previous average of 30 ppm. Refiners, both foreign and domestic, must average 10 ppm sulfur or buy credits to offset the difference. The new rule has caused a lot of uncertainty in the gasoline market and many believe it will divert imports that normally come here while encouraging US refiners to send their product elsewhere.
At the moment, most Atlantic Coast gasoline traders consider the arbitrage from Europe closed and say it will likely stay that way until the distribution chain dips further into its stocks.
Thomas Finlon, director of Energy Analytics Group, said the new sulfur requirements for gasoline in the United States are causing uncertainty about the cost to remove sulfur to meet new environmental regulations.
“A lot of refineries are having a hard time with it,” he said. Many US refineries are running high sulfur crude slates, which makes it difficult to produce gasoline that meets the new sulfur specifications.
Although many of those refineries have hydrotreaters in place to reduce sulfur, that process can be expensive, he said. “This jump downward to 10 ppm is difficult and costly. That is the reason why gasoline inventories are not building,” he said, adding that gasoline inventories normally grow this time of year.
US Energy Information Administration data showed total gasoline stocks fell 1.6 million barrels to 227.1 million barrels for the week ending December 23.
In addition, he said the increase in gasoline exports to Mexico and other parts of Latin America stems in part from the difficulty and expense of meeting the lower sulfur requirements. Latin America currently allows higher sulfur content in its gasoline supply.
“It’s easier to send it out than to keep it in,” he said of the current gasoline production in the US. For European refiners wanting to export, it may be easier to send product to Latin America rather than to the US Atlantic Coast.
With the possibility of greater gasoline exports, the US market may become more dependent on imports to make up the shortfall. Currently, more than 88% of US imports go into the US Atlantic Coast, the largest market for fuel in the US and one which is structurally short. Atlantic Coast refiners do not produce near enough to meet the demand of the region’s drivers.
As a result, the region imports supplies from Europe and Canada. European refiners produce more gasoline than the region needs, and OCED Europe exports about 1 million b/d, or one third of its gasoline production. But long-term gasoline export markets for European refiners are shrinking.
While the flow of gasoline occurs naturally from Europe into the US Atlantic Coast, it’s not a steady stream of product. Instead, trade ebbs and flows with supply and demand on both sides of the Atlantic. The average is about 710,000 b/d, but there are wide fluctuations from week to week. The highest import mark over the last year was over a million b/d on September 30 and the low was 415,000 b/d on March 18.
A large portion of that flow of gasoline is from a European refiner directly to its retail outlets in the US. Another portion is from one European exporter to a US importer and is based on long-term supply contracts. Neither of those enter the spot market in the US.
But the third and most volatile component of US gasoline imports come through arbitrage shipments, one-off shipments that occur when the spot price of gasoline in the US is high enough to offset the cost of buying an incremental cargo of European gasoline and shipping it to the US. The difference in price on both sides of the Atlantic needs to be wide enough to pay for shipping and RINS, a second important cost for importers.
Import data released weekly from the EIA can show when an arbitrage is open and when it is closed and when there are significant infrastructure problems within the US. Gasoline imports into the US surged in the weeks after the Colonial Pipeline shut down the flow of products following a leak in late September and a fire a few weeks later. In each case, Atlantic Coast gasoline distributors were starved for supply; stocks plunged and weekly imports surged to make up for the shortfall.
However, most gasoline analysts consider that weekly report backward-looking information. “An increase in last week’s imports shows someone saw an arbitrage opportunity three weeks ago. It says nothing about what happens now,” one gasoline trader said.