Viewpoint: USGC 2022 gasoline arb options to expand

Opportunities for gasoline producers in the US Gulf coast (USGC) to offload product should continue to increase in early 2022 as global and domestic demand continues to recover.

Arbitrage opportunities for Gulf coast producers were limited in early 2021 as Covid-19-related restrictions were in effect amid the emergence of the Delta variant, with lockdowns and travel limitations significantly affecting global demand for refined products.

Demand both domestically and globally has since recovered steadily, opening various opportunities for Gulf refiners to move product out of the region. This trend could continue into 2022, even as the Covid-19 Omicron variant is expected to temporarily slow, but not upend, the recovery in demand.

Gasoline demand — as measured using the Energy Information Administration's (EIA) product supplied as a proxy — which plummeted to record lows in 2020, has since rebounded. Pre-pandemic, US product supplied of finished motor gasoline has typically ranged between 8.22mn-9.77mn b/d. Product supplied averaged 8.945mn b/d for 2021, rebounding to within 56,000 b/d of the five-year average.

US demand looks promising going into the first quarter of 2022, as rising Covid-19 cases have so far failed to deter consumers. Data pointing to the efficacy of Covid-19 vaccines against the Omicron variant may also contribute to more robust outlooks and rising production in the new year.

Domestically, economics have shifted around for inter-regional arbitrages, with the Gulf/Atlantic coast arbitrage opening towards the latter part of 2021 as prompt shortages along the upper US Atlantic region have continued to drive demand for product shipped along the Colonial Pipeline's 5,500-mile length from Pasadena, Texas, to Linden, New Jersey.

Demand along the Colonial system has remained strong since mid-October when it reached allocation, meaning demand surpassed the pipeline's capacity, for the first time since late August of 2020. Since then, the pipeline has been fully allocated for 17 consecutive cycles extending through 10 January, its longest stretch under allocation since mid-March 2020.

This trend will likely continue to into the first quarter of the new year as limited imports and a lack of sellers exacerbated the situation, lifting prompt prices in the New York Harbor and keeping inter-regional spreads wide. Gasoline imports from Europe this winter have been down compared with the same period last year, despite higher demand.

As a result, backwardation in the forward curve for gasoline in the upper Atlantic has been unseasonably strong, with prompt availabilities of product drawing premiums over barrels received at a later date. This condition is unlikely to change, keeping the New York Harbor as a good outlet for Gulf product.

Gasoline exports out of the US Gulf coast to Latin America rose steadily in 2021, with fourth quarter loadings of finished gasoline reaching 277,300 b/d, according to oil analytics firm Vortexa. This was up by 4,000 b/d from the third quarter, and more than 100,000 b/d above year-earlier levels.

These elevated exports should continue as demand from Latin America persists, with Mexico continuing to be the largest importer of Gulf barrels.

In year-over-year comparison, Gulf exports of gasoline to Latin American destinations rose by almost 60pc in 2021 as demand from importers gradually recovers. The total volume of exports increased by more than 39mn bl to 90.35mn bl for all of 2021.

By Paul Dahlgren