From Charles Kennedy: U.S. refiners continue to expand their footprint, exporting record volumes of product abroad. The U.S. refining complex exported nearly 4 million barrels per day of gasoline, distillates and propane, helped by operational issues in refineries in Latin America.
“The high exports are due to the poor refinery operations that we’re seeing in Mexico and Venezuela, creating a demand for a record amount of exports off the Gulf Coast,” Andy Lipow, president of Lipow Oil Associates LLC, told Bloomberg in an interview.
Gasoline exports have doubled since the summer, exceeding 1 million barrels per day in recent weeks. There are a few reasons for this development. Over the past few years, refiners have taken advantage of record U.S. crude oil production to churn out ever more refined petroleum products. Also, the discount that WTI has traded at relative to Brent has made U.S. products more competitive abroad. Refiners purchase cheaper WTI, refine it into gasoline and distillates, and export the products abroad at prices that are more closely linked to higher Brent prices.
But that does not explain the more recent spike in exports. Demand abroad is rising quickly and some refineries have had issues with operations. The decrepit state of Venezuela’s oil industry has led to declines in production. Mexico has struggled to increased refined output, even as demand rises.
The situation has led the market contango for gasoline futures to flip into a state of backwardation. Contango, in which front-month contracts sell at a discount to futures further out, is an indication of near-term oversupply. Backwardation, the reverse of a contango, is a symptom of market tightness. The front-month premium is inducing more production from U.S. Gulf Coast refiners. Thus, the higher level of exports.
It is not clear that the situation will last. China is increasing its exports to Latin America, a level of competition that could make it difficult for U.S. refiners. “As they process more crude and they saturate the Asian markets, I expect that some of their products will make their way over to Central and South America,” Lipow told Bloomberg. Also, Mexico just moved to liberalize gasoline prices, which will necessarily lead to price increases. Higher prices at the pump will likely put a dent in demand.
Still, for a year that has not been great for the downstream sector – refining margins have narrowed sharply compared to 2015 levels – U.S. refiners will be glad for the end of the year surge in exports.
