In the first quarter of 2018 the US state of Florida saw its imports of gasoline from abroad rise above historic norms as inflows from the US Gulf Coast dipped, S&P Global Platts analysis of various data sets from the US federal government shows.
US market sources attributed the trend to strong US gasoline exports out of the USGC, which have limited the number of barrels available to the Florida market, while European market sources said that the gasoline arbitrage to the US East Coast was open throughout Q1.
To be sure, US gasoline exports had a landmark first quarter. Over January through March, exports averaged about 800,900 b/d, which is 37.2% -- or more than 217,500 b/d -- above the prior three-year average, according to data from the US Energy Information Administration.
During the week ended March 23, US gasoline exports breached the 1 million b/d level -- the first time that's ever happened in the first quarter in EIA data going back to 1991.
The EIA says the US Gulf Coast accounts for the lion's share of American gasoline sent abroad and the agency's data show the region sent out more than 90% of all US gasoline exports in 2017.
This has important implications for the Florida gasoline market, which, unlike other states in the US Southeast, has no refineries and few pipeline connections to bring fuel in from the Gulf Coast. For this reason, "Florida's transportation fuel supply relies overwhelmingly on domestic and foreign-sourced marine deliveries," according to a special report drafted by consultancy IFC International on behalf of the EIA in 2016.
Indeed, the vast majority of Florida's gasoline supply comes from waterborne movements, which trends above 300,000 b/d throughout a typical year, according to the report. "The continuity of the state's supply chain is overwhelmingly dependent on the continuous flow of domestic and foreign-sourced transportation fuels through its ports, which bring in more than three-fourths of the state's total consumption," the IFC report said.
EIA data show the total US has seen strong gasoline demand in Q1, with deliveries by prime suppliers averaging 360,423,700 gal/day January through March, the strongest since 2008. This, however, has not been the case for Florida, which has seen prime supplier deliveries of gasoline slip down to an average of 19,990,200 gal/day, the lowest since 1997 when it averaged 19,790,133 gal/day.
Ned Bowman, executive director of the Florida Petroleum Marketers Association, said that these demand statistics were somewhat surprising.
"People are moving to Florida every year and the economy is strong. Just last month Rick Scott [the Governor of Florida] announced that 2017 was record breaking in terms of tourism here."
He added that gasoline demand is seasonal and that, regardless of statistics for the first quarter, he foresees Florida remaining the third largest gasoline market in the US and expects sales there to reach 12 billion gallons or more by the end of 2018.
FLORIDA TRADE FLOWS
In the context of weaker fuel sales in Florida, data from the EIA and US Customs Bureau show a dent in Q1 waterborne gasoline deliveries from the USGC, while suppliers from abroad increased their market share.
According to a US shipping source, "most of the moves from the USGC to the [USAC] is for crude and not products. For products, most moves are straight from Europe to the USAC and they do go straight into the Florida ports."
This view is supported by EIA and US Customs Data, which shows that volumetrically, USGC refined product movements to Florida are a fraction of movements into the state originating from outside the US.
Citing the economics of the arbitrage, another US gasoline trader active on the East Coast said: "European octanes are cheap. Over there the standard grade is 95 RON or higher, so I bring gasoline from Europe to the East Coast all the time. I think I have maybe brought one cargo from the Gulf to the East Coast in the past six months."
In Q1, waterborne tanker and barge deliveries off finished gasoline and gasoline blending components from the USGC into the Lower Atlantic Region (PADD 1c) totaled 36,526 barrels. This was 5,198 barrels, or about 12.4% below the prior two-year average.
These data are a sound proxy for Florida's waterborne imports from the Gulf Coast because the state consistently accounts for the vast majority of waterborne refined product imports into the Lower Atlantic region. The other Lower Atlantic States -- Georgia, South Carolina, North Carolina, Virginia, and West Virginia -- all get most of their transportation fuels via the Colonial and Plantation pipeline systems, according to the EIA.
US Customs Data compiled by S&P Global Platts Analytics meanwhile shows an increase in foreign barrels reaching Florida to start 2018. In Q1, Florida imported 3,756,443 barrels of gasoline and gasoline blendstocks, excluding RBOB and premium RBOB -- 14.9% above the prior two-year average.
As Florida is not home to any reformulated gasoline markets, it can safely be assumed that RBOB imported to Florida was not consumed in that state, but intended for transportation elsewhere, another East Coast gasoline trader said. This is why Florida imports of RBOB were not considered in the aforementioned calculation.
According to multiple European market sources, the gasoline arb from Europe to the US has been open since the start of the year, causing the strong exports seen throughout the first quarter. The East Coast typically relies on Europe and Canada for gasoline supplies, but why did the USGC send fewer barrels to Florida this year?
Multiple US sources said they believed that strong demand in Mexico and Latin America for US barrels worked to pull USGC refined product flows away from Florida.
"I believe exports are the angle to look at. Mexican refineries remain a basket case and their crude production curve is not favorable... this won't improve any time soon," said a US gasoline source who trades on behalf of a refiner.
This take on the market is supported by EIA data, which show US gasoline exports to Mexico averaged 559,000 b/d January through March, the highest for those months in data going back to 1993.
A second US market source, another trader, said that while gasoline demand in the USGC has risen year-on-year, he agreed fuel demand from Mexico and other foreign countries was a more likely explanation for reduced gasoline flows from the Gulf to Florida.
Philip Verleger, an economist who studies international energy markets, said he also thought this explanation was compelling. "This is how the market has always worked. Product flows into the areas with strong demand and less competition. Europe has a continual gasoline surplus because it's a mostly diesel-powered transportation market. This creates intense competition on the US East Coast between suppliers from Europe and the Gulf Coast, who are forced to offer barrels at lower prices, so the appeal of exporting to Mexico or South America makes perfect sense, given the lack of competition from Venezuela we are seeing this year," he said.
Due to political and economic turmoil, output from Venezuela's oil complex has been notably poor in 2018. PDVSA, the Venezuelan state oil company, notified 11 international customers in early June that it would not be able to meet it full crude oil supply commitments for the month, and its refined product production has been below historic norms all year.
This helps explain why, in addition to Mexico, other Latin American nations are increasing their imports of US made fuels. EIA data show that US gasoline exports to Brazil averaged more than 52,000 b/d in Q1, the strongest in data going as far back as 1993.
Gasoline exports to Uruguay in the first quarter averaged more than 42,000 b/d, also the highest since data began being collected in 1993.
FUTURE OUTLOOK UNCERTAIN
Whether or not Florida will continue to lean on foreign gasoline imports at the expense of fuel flows out of the USGC throughout the rest of 2018 remains to be seen.
The US refiner source said that he does foresee Mexico's domestic gasoline production ramping up anytime soon, which would suggest that the country will continue to pull in USGC gasoline at a higher rate than usual.
According to data from Mexico's energy secretariat SENER, that country's domestic refining complex produced 276,800 b/d of gasoline in April, the latest month for which data is available, which is the weakest level of production seen in that month going back at least as far as 2000.
The source also pointed out that Mexico has a presidential election in July and the policies of a new administration -- the front runner is socialist-leaning candidate Andres Manuel Lopez Obrador, who has in the past pledged to overturn Mexico's energy reform -- could have an immediate, profound effect on gasoline flows from the US, adding to uncertainty in the market.
European sources, for their part, have said that gasoline arbitrage into the US East Coast may now be losing its luster due to a widening spread between Brent and WTI crude oil.
"The RBOB crack to WTI is going to the roof and RBOB to Brent is collapsing. This impacts the Eurbob/RBOB spread [with] the WTI/Brent [spread] creating distortions in the relative value of oil," a European source said. "Exports will slow down soon," a second European source said, citing the Brent/WTI crude oil spread.
