Refinery problems continue to bolster gasoline. Just as US East Coast refineries are set to return to normal, Californian gasoline prices lurched higher after Valero’s Benicia refinery was forced to shut down due to problems with its pollution control equipment. The idling of the refinery amid a slate of planned maintenance work across the region helped to send Carbob gasoline to huge premiums of more than $16 per barrel to prevailing RBOB futures prices and helped push weekly US FCC outages in early April to levels last seen during Hurricane Harvey in 2017.
California’s relative isolation from the rest of the US refining system means if it needs help it can have an outsized influence on the broader market if problems are severe. In 2015, the explosion at the Torrance refinery increased competition for high quality gasoline blending components, tightening gasoline prices in PADD 1 even though overall stock levels were relatively comfortable. Flows into the USWC have already started to tick higher and at least one Jones Act vessel has sailed with USGC gasoline on board, suggesting the outage could be lengthy.
The PADD 5 outages come as other parts of the US are wrestling with a number of FCC problems and octane values have started to climb higher, pushing up to levels last seen in May 2018 even as peak US driving activity is mere weeks away. Under normal circumstances the US can easily supply more than enough gasoline to meet demand. But these are not normal circumstances. The duration of the latest problems will be the key to the market going forward.
So it is not surprising that US gasoline stocks ended March some 11 mb lower y/y, drawing in the first quarter for the first time since 2015—by early April that year RBOB cracks had shot up to nearly $20 per barrel. While similarities can be drawn between now and 2015, there are still important differences. Stocks in PADDs 3 and 5 are higher by almost 7 mb than end-March 2015 levels. Secondly, planned FCC work in Q2 15 is 0.15 mb/d higher than in Q2 19 across Europe and the USGC. Furthermore, the extreme tightness that developed in PADD 5 following the Torrance accident is still a long way off as USGC supplies are due to start recovering. Exxon is reportedly set to restart part of the damaged hydrotreater at Baytown, which, if successful, would permit the restart of its idled FCC.
There is one other key difference from 2015. In 2015, demand growth was shooting higher as crude prices plunged. This time around, US gasoline demand has been struggling and higher prices are weighing on consumption. Demand was flat y/y in January, extending the string of weak readings in the world’s biggest gasoline consumer. In this context, US gasoline stocks look healthier than they were in 2015, especially if USGC refineries are able to ramp up from maintenance this month.
Amid the recent tightness, it is worth reiterating that the fundamental problem facing light ends has not gone away. Demand growth is too slow to absorb the expansion of supply due to the lightening of the global crude slate and growing octane-making capacity worldwide. This does not mean the market cannot move to the upside, but the status quo is to weakness. Unplanned outages, especially in great numbers can temporarily reverse fundamentals but the change will not stick.