The gasoline market has been transformed by the shutdown of the 0.35 mb/d Philadelphia Energy Solutions (PES) refinery. The plant had been at the top of everyone’s list of most vulnerable refineries to closure, but no one expected it to shut down at the height of the US driving season.
The loss of the biggest refinery on the US East Coast has increased regional import requirements by at least 0.1 mb/d, and while there is plenty of inventory on hand in Europe to sustain a ramp up in shipments for the time being, the transition period to winter gasoline in late August and early September is likely to be highly volatile, as exporters will be reluctant to send summer-grade fuel across the ocean in the final weeks of the driving season.
Even if gasoline imports average over 0.72 mb/d over July and August, PADD 1 gasoline inventories are likely to end the summer at their lowest level since 2012. Into 2020, gasoline imports are going to have to stay at high levels of around 0.7 mb/d for the entire year, some 0.13 mb/d higher than the 2018 annual average, if PADD 1 is to be balanced. Moreover, given the difficulty in sustaining very high exports over the summer into the US, the market needs to incentivise more storage of summer-grade material during the winter months.
Europe, the swing supplier of gasoline into PADD 1, will see a greater call on its gasoline output from this point. Overall European gasoline exports do not fluctuate dramatically over the course of the year, averaging around 3.9 Mt per month. Europe shipped over 0.3 Mt per month on average in 2018, but volumes were typically higher during the winter months when US gasoline demand is seasonally lower. If greater storage volumes will be needed, it is likely that European gasoline shipments to East Asian markets including China will drop substantially.
Lower flows of European gasoline to Asia will help clean up some of the structural overhang in Asian gasoline markets in two ways: by reducing the Chinese gasoline surplus that must be exported, and by increasing the demand for alternative supplies into Far Eastern markets served at times by Europe. European gasoline supplies to Pakistan and other markets may also diminish, opening up new opportunities for Asian traders and refiners.
Even more help for Asian gasoline markets will come from IMO 2020, which is already incentivising export refiners equipped with RFCCs to sometimes sell feedstock into the marine fuel market rather than make gasoline at a loss. Asia may well become the market where marine fuel and gasoline are most tightly linked due to the use of residual fuel as an FCC feedstock in Asia, the large amount of residual desulphurisation capacity available in parts of the region, and the limited amount of low-sulphur residual cuts in crudes processed east of Suez.
The bottom line is that the impact of the PES shutdown will reverberate into 2020. Imports into PADD 1 need to rise structurally and meeting summer demand will require greater stock draws than in the past due to the limits on the amount of gasoline that can be easily imported at the peak of driving season. Volatility will be higher in the future with lower supply at the main pricing centre for gasoline and growing competition from the marine sector.