Driving Discussions: US road fuels exports, floating storage and freight markets

Author Argus

The latest podcast in our Driving Discussions series provides an update on the US gasoline and diesel markets.

Listen in as Nick Watt, Americas Freight Editor and Chunzi Xu,Deputy Editor, US Products, discuss the current US road fuels markets landscape and its effects on floating storage and freight markets. 

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Nick: Hello and welcome to "Driving Discussions." In this series, we'll discuss the forces that affect road fuels globally. And in this episode, we'll be discussing the U.S. diesel and gasoline markets and the effects on exports to Latin America. Driving Discussions is brought to you by Argus Media, which as many of you know, is a leading independent provider of energy and commodity pricing information. My name is Nick Watt. I'm the freight editor for the Americas here at Argus and with me today is Chunzi Xu, deputy editor of U.S. products. And Chunzi is going to start us off today. Chunzi?

Chunzi: Thank you, Nick. I guess we could start with when everything began shutting down in mid-March here in the U.S. We saw gasoline prices respond immediately, hitting bottom by late March and early April. And this happened in both Nymex futures and regional spot markets in the U.S. Gulf Coast and everywhere in the country. U.S. refiners responded pretty quickly by cutting production by 25% to 30% basically running at minimum rates for these refineries. And at this point, the low cash prices attracted buyers in Mexico and Brazil, two of the U.S.'s largest buyers for clean products. And freight is pretty cheap too at this point. And so, Mexico and Brazil ended up taking more cargos than usual during second-half March and first-half April, and basically filled up onshore storage. And that was when we began to see floating storage really pick up.

Nick: Yes, we've been seeing that on the freight side too. Floating storage for clean tankers really started to ramp up starting in late March and by mid-May, it had risen from its normal level of about 25 to 30 million barrels of clean products and floating storage to over 100 million barrels. And that's globally. But much of the floating storage was actually a result of discharged delays on normal charters. So storage tanks in Mexico, Brazil, Chile, other places but particular in Mexico, were starting to fill up, and so there was no place to put the cargo that was sitting on the tankers. So you had weeks and weeks of delays and all these discharged delays, also the floating storage bookings paired with export cargo demand caused clean tankers...sorry, caused clean tankers to skyrocket starting in the first half of April.

For instance, in mid-April, the U.S. Gulf Coast to east coast Mexico rate rose from its level of 195,000 all the way up to over a million dollars which is just an incredible increase. So even though some of these cargos were attractively priced, you had rising freight rates as well that started to figure into the equation.

Chunzi:. It made sense for some people to do that because storage was and continues to be very profitable because of the contango and the foreign curve, and that just means future prices are higher than prompt and you can make money by holding onto product. in late March, you can make as much as 30 cents per gallon on gasoline if you stored it for six months, if you were to sell it in the fall and even more than that if you stored it for a year. And that's unusual. It's the reverse of what typically happens. At this time of year, gasoline is typically in backwardation because refineries would just be coming out of the spring turnarounds and producers are starting to make summer grade gasoline to prepare for the peak summer driving season. And so, you would typically lose that much, 20, 30 cents if you held onto product at the start of the driving season. So, this year has completely flipped and it made sense for people to put product in storage.

Nick: Okay. Yeah, that's something that we've been seeing in freight as well, Chunzi. We saw surging cargo demand in April for shipments that were going from the U.S. Gulf Coast into the Caribbean and largely into storage, they're not necessarily floating storage but into the onshore storage that exists there in the Caribbean. And it was these higher exports, not just the Caribbean but to many other locations combined with tonnage supply that was being tied up by floating storage, that caused freight rates to climb to their record highs starting in late April.

But then, starting early May, we saw export cargo demands start to fall off and freight rates started to reverse their gains. I know that the high cost of freight was one of the reasons that we saw lower U.S. refined product exports because charters did not wanna pay such high rates. But maybe Chunzi, you can speak a little bit to what you were seeing in the product market that was causing U.S. refined product exports to slow.

Chunzi: Obviously there's the drop in demand in Latin America and other export destinations for U.S. refiners when everywhere began to shut down. Pemex, Mexico's state-owned Pemex began raising domestic production in April to 10% above year-ago levels, while their demand was down by 40% year-on-year. So that added to the surplus that had already been growing from increased imports from the U.S. As a result, Mexico stopped buying from the U.S. in May and that was a similar story to what was happening in Brazil. Brazil's Petrobras started raising domestic production in part to produce more LPG, but in that process they also produced more gasoline and diesel and the country stopped importing as well. So these two countries are unlike many other Latin American countries in that they don't buy on a term basis, they buy on a spot basis which allows them more flexibility to stop buying completely when they didn't need the product.

Nick: That's really interesting, Chunzi. That's something that we saw in the freight market too. We saw spot cargo demand really come to a halt at that time, and that was one of the reasons that freight rates dropped from their record levels and by mid-May, they were 75% lower than they were at their late April peaks. And rates have since then, remained at roughly that level, this sort of depressed level. And some of the slowing exports make sense if you think about a lot of the discharge delays. You had a lot of tankers that were waiting to discharge in Mexico, Brazil and from, you know, if you're buying on the spot market as an importer, why would you charter more tankers full of product that you can't even store?

Right about now, there are 25 or so clean tankers in the Americas in floating storage. And globally, and that's probably lower than it was or it's certainly lower than it was about a month ago. Clean floating storage globally has dropped from 100 million barrels in mid-May to where it is now of about 80 million barrels. And if you remember, something I mentioned earlier, the normal level is about 25 to 30 million barrels, so we're very far from normal from a freight market perspective.

One of the reasons that we've seen a drop from 100 million to 80 million has been some destocking. For instance, one example that I can provide is the LUKOIL Charter Torm Camilla that had been booked for floating storage in the U.S. Gulf Coast back in March and had been sitting there for well over a month. That ship has since slided off its cargo into another tanker, which then went up to east coast Canada to discharge. So you've had some of these tankers coming out of floating storage, but then you've also had globally some actually going into floating storage and that's particularly been the case in Europe and to a lesser extent, in west Africa.

And one of the reasons we've seen some more tankers go into floating storage, even though it's at a much slower rate than it was earlier, is because lower freight rates have improved the economics of holding the cargo. And just to give you an idea of what clean floating storage is...how it's sort of moved a little bit. The Argus floating storage bookings database shows that a total of 138 clean tankers have been booked with floating storage options since March. And the actual number of those that are being used as floating storage has actually remained pretty steady in about the mid-30 or so tankers since May.

So in terms of the number of tankers that have been booked for floating storage, those that are being used for floating storage are about...those numbers are pretty steady. The thing that is decreased has been the port congestion, so that's why you see the 100 million barrel drop to about 80 million barrel drop. So you see right now, it's a difficult market. You see some tankers coming out of floating storage and you see others going in. You see port congestion still there but actually decreasing a little bit. So it's an unclear picture of what's happening in the oil market and whether or not the oil market is actually rebalancing. So Chunzi, maybe you can talk a little bit about what you're seeing with the U.S. oil market and U.S. oil demand.

Chunzi: The lack of exports is kind of muddling the picture for the U.S. domestic demand recovery that we started seeing in May when states began reopening. we did see a U.S. domestic demand particularly for gasoline steadily rise since the States began reopening in May, but exports fell off in May, as we were talking about. And as a result, these inventories kept growing and we're seeing, for example, diesel stocks at a 10 year-high, and that will take a long time to work down. And as a result, refiners are keeping the 25% to 30% run cuts that were put in place in MarchIn Latin America, we saw Mexico City begin to reopen in mid-June, which has boosted their fuel demand but they have a lot of inventory to work down, just like the U.S. and everywhere else. Mexico started importing more MTBE from the U.S. this month, though finished gasoline imports have remained low at around 75,000 barrels per day in June so far when the typical volume is around 300,000 barrels per day, which is about the size of a mid-range vessel, an MR.

In Brazil, we're seeing they're buying more U.S. light naphtha, which they use either for [petchem or for gasoline. But their capacity to take U.S. product is limited by higher ethanol consumption there. June is their peak sugarcane harvest and they run a lot of straight up ethanol, 100 straight up anhydrous ethanol and also anhydrous ethanol in conjunction with gasoline.

So Nick, are you seeing any bright spot for freight in the near term?

Nick: Well, not bright. I don't know if bright is the word I would use. It's looking a little bearish on the clean tanker side, because right now you have fairly muted exports really globally, not just out of the U.S. Gulf Coast, which hurts clean tanker demand. And then on the supply side, you're looking at a lot of clean tankers coming out of floating storage, whether it's because of port congestion or if it's because their floating storage contracts come to an end. You're looking at a lot of those tankers being freed up again and being able to operate on the spot market, which will put downward pressure on rates. So there's a lot of reason to think that the clean tanker market could remain pretty weak in the near term.

There's also, if you want to look for a bright spot if you're on the ship owner side, there's a possibility that the U.S. decides to sanction a large swath of vessels that could take them out of the market, which could put upward pressure on freight rates. Something that happened last year is in September 2019, when the U.S. sanctioned a COSCO subsidiary that led to a record rally in freight rates, that started with the dirty tanker market and then trickled down to the clean tanker market. And so, there's a chance that the U.S. does something similar in the near future that could help the market. It hasn't happened yet and really only time will tell if that does happen.

Chunzi: Well, I guess another bright spot if you could say that would be the relative lack of impact of IMO, which everybody fretted over last year, in the second half of last year. And this year, that's just been completely overshadowed by everything else that's going on. And low-sulphur fuel oil has gotten so cheap that nobody is really worried about the cost of that anymore.

Nick: Right. The higher costs of fuel that many were predicting has certainly not been what the reality is, has become.

Chunzi: Yeah. It hasn't been easy for U.S. refiners to find the balance, not optimizing production. When the lockdown first happened, gasoline fell very quickly, and so people maximized diesel and minimized gasoline production. And that led to an excess of diesel that became a huge problem in May when diesel margins fell below gasoline, which is pretty unusual. And then, refiners had to readjust by cracking distillates to make more gasoline feedstock. So right now, it's all about refiners being able to time the ramp up in production with the recovery in domestic and export demand, and whether they ramp up at the secondary or at the crude level. Yeah, so it's just comes down to that.

Nick: That decision by refiners on when to ramp up production and therefore exports will also play a role in what happens in the clean tanker market. So I think that about wraps it up, Chunzi. What do you think?

Chunzi: Yeah, I think so.

Nick: All right. Well, thanks, Chunzi, for joining and thank you, thanks to everybody for listening. And if you enjoy this podcast, please be sure to tune in for the other episodes in our series, "
Driving Discussions." For more information on Argus Refined Products and Freight, please visit argusmedia.com

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