Viewpoint: USGC fuel arbitrage opportunities to grow

Arbitrage opportunities to ship gasoline out of the US Gulf coast are expected to rise in 2021 from 2020's lows as domestic and overseas demand is expected to recover from the Covid-19 devastation with newly approved vaccines.

Even as the pandemic enters its worst phase yet this winter, gasoline consumption has charted a slow recovery over the past few months. Albeit uneven, the recovery is expected to pick up pace next year as the vaccine could tame the virus and in turn spur road travel.

The pandemic has limited the usual outlets for US Gulf coast gasoline producers this year, including the US Atlantic coast and midcontinent regions, which are both connected to the Gulf coast via pipelines.

Additionally, many Latin American countries that rely heavily on imports from the US Gulf to meet domestic demand have cut their imports this year. Between January and September 2020, US Gulf coast finished motor gasoline exports to Mexico — which accounts for roughly 60pc of the region's gasoline exports — totaled 104.65mn bl, down by nearly 10pc from the same nine month period in 2019, according to the US Energy Information Administration (EIA).

Gasoline demand in the US Gulf coast has followed a similar pattern for years, with the summer driving season always buoying demand towards the middle of the year. This year, amid unprecedented conditions, gasoline demand — as measured using the EIA's product supplied as a proxy — plummeted to record lows.

In the past five years US product supplied of finished motor gasoline has ranged regularly between 8.261mn and 9.777mn b/d. But in April 2020 demand dropped to 5.329mn b/d, the lowest level since the EIA began tracking data in March 1991.

The US Atlantic coast has always been one of the largest importers of US Gulf coast barrels, with the Colonial Pipeline shipping roughly 45pc of fuel consumed along the US east coast.

In recent years, even before the emergence of Covid-19, demand to ship along the Colonial Pipeline's main gasoline bearing Line 1 diminished. The line used to regularly reach allocation — meaning demand to ship exceeded the line's capacity — for all 72 cycles of the year up until 2017. It was at this point when, for the first time in at least five years, demand fell below capacity.

Since then, allocation of cycles has steadily declined, with only 45 out of 72 cycles being fully allocated in 2019. In 2020, that number fell to 21. Between this sharp decline in demand and a record-breaking Atlantic hurricane season, Gulf production was severely hampered this year. Net production of finished motor gasoline fell to its second-lowest level on record in early April, with only 1.5mn b/d being produced. The only time production has been lower in the last 27 years, since the EIA began tracking the data, was in 2017 when Hurricane Harvey crippled the US Gulf coast production region.

Shipments of gasoline up the Explorer Pipeline into the US midcontinent also declined as road travel diminished sharply amid stay-at-home orders. The region received 21,677 b/d of finished gasoline from the Gulf coast from April through September this year, according to the EIA's most recent data. This was down by 50.7pc from the same six months in 2019, and it was the lowest stretch of shipments from the Gulf coast since late 2014.

Exports of gasoline out of the US Gulf coast declined similarly to reach an average of 621,000 b/d in the first nine months of this year, down by 12pc from the same period in 2019, EIA data show.

By Paul Dahlgren