SAN ANTONIO, 20 March 2017 — Following strong demand growth in 2015 and 2016, US gasoline demand surpassed its 2007 peak to reach 9.4 million b/d — nearly half of the country’s total refined product demand. However, gasoline demand may be nearing a new peak according to Andrew Shepard, Americas Oil & Refining Markets Analyst at Wood Mackenzie. Speaking at the American Fuel & Petrochemical Manufacturers (AFPM) annual meeting in San Antonio, TX, Shepard explained, "Gasoline demand in the US will decline in response to stringent fuel efficiency standards and shifting demographics. We forecast that US gasoline demand declines by over 1.7 million b/d by 2030."
As demand declines, Shepard emphasized that the US will move toward a large gasoline surplus, forcing refiners to find new markets and increase gasoline exports. But, demand growth in Mexico and Latin America — the US’ primary export markets — will not be enough to absorb the growing surplus. "US refiners will need to export to Southeast Asia, where strong demand growth will lead to a structural gasoline deficit. But, moving from a net importer of gasoline to net exporter, and exporting to distant markets, will depress gasoline prices and could lead to capacity rationalizations," said Shepard.
Gulf Coast Impact
According to Shepard's technical paper, US Gulf Coast refiners as a whole are competitive enough to ship into Southeast Asia and remain profitable. US refiners have several important advantages over refineries in Southeast Asia, including direct access to discounted North American crude oil, cheap natural gas and highly complex configurations. But some Gulf Coast refineries are expected to become uneconomic as gasoline prices are depressed to open up the arbitrage to Asia.
"Lower gasoline prices in the US Gulf Coast will also affect pricing in the Midwest," noted Shepard. There are additional complications for the Midwest, too. "Today, PADD II imports over 400 kbd of gasoline from the Gulf Coast. Since the Midwest imports significant volumes of gasoline from the Gulf Coast, gasoline pricing is generally set at a premium to the Gulf Coast that accounts for transportation cost. However, as gasoline demand declines the region will move from a gasoline deficit to a gasoline surplus, which could erode this premium pricing." If the Midwest must push into the Gulf Coast to clear the surplus, Midwest gasoline pricing could be severely depressed. These prices could render roughly 350 kbd of gasoline supply — corresponding to over 700 kbd of distillation capacity — uneconomic. To avoid such shutdowns Midwest refiners should seek to gain increased access to the higher-priced East Coast market.
East Coast impact
Shepard explained the impact of declining demand and lower gasoline pricing on the East Coast, noting that the refining industry in PADD I faces significant challenges: "East Coast refineries are already at a disadvantage relative to refineries in the Midwest and Gulf Coast — they must pay for expensive imports while Midwestern and Gulf Coast refineries have access to discounted North American crude. With lower gasoline prices we expect that nearly half of PADD I refining capacity could become uneconomic by 2030. Higher than expected supply of gasoline from Midwest into the East Coast, an expansion of existing pipelines from the Gulf Coast, or unexpected strength from European refineries could force additional East Coast closures."
In conclusion, Shepard emphasized that refiners must position themselves for when US demand declines: "Gulf Coast refiners will need increased access to export markets. For Midwest refiners, outlets for an emerging gasoline surplus are critical. There have been recent projects to bring product from the Midwest to the East Coast, but more will be needed. East Coast refiners will be squeezed between a rock and a hard place." Roughly half of East Coast refining capacity is expected to shut down in this forecast, but more capacity is at risk if there is greater than expected competition from the Midwest or if new capacity is added from the Gulf Coast. The East Coast’s best bet is to outcompete the European refineries that supply the East Coast market."