Disconnected US fuel markets drive imports despite RVO

Strong US environmental compliance costs have done little to curb refined product imports into the US in March and first-half April, as buyers in the US Atlantic coast became increasingly disconnected from producers in the Gulf coast.

The renewable volume obligation (RVO), a measurement of the cost of complying with US biofuels blending mandates, applies to importers of finished gasoline, including RBOB and CBOB, as well as diesel. High RVO traditionally boosts exports and deters imports, but with the arbitrage between the east coast and the Gulf closed, this pattern has been less clear despite historically strong RVO.

This trend was exaggerated over the past two months when a severe winter storm in mid-February devastated US crude processing and limited fuel availability across the Gulf coast. But even before the storm and the lengthy recovery, the structurally short Atlantic coast markets have been more readily supplied by imports from Europe, Canada, even sellers from Brazil and Colombia.

The increasing reliance on imports mirrored the decline in Colonial pipeline shipments from the Gulf coast. The Gulf coast market, supported by exports to Latin America, constantly fetched prices too high to make arbitrage shipments to New York Harbor economically viable.

This became exacerbated in late March, when the pipeline company said it had no diesel inputs from Houston after low shipment volumes caused delays earlier in the month.

These delays persisted into April, which was especially problematic for gasoline shippers trying to balance supply in the middle of the gasoline transition season. Winter-grade gasoline shipments from the Gulf coast in March are arriving several weeks late in New York Harbor, where demand has mostly moved to the summer grade. Batches of winter-grade high RVP gasoline arriving in Linden, New Jersey, struggled to find buyers, and had to be sold off by the pipeline company in seven auctions over the past two weeks.

Meanwhile, New York Harbor has attracted a surge of imports from Europe and Brazil, where rising Covid-19 cases are capping demand just as vaccination rates rise in the US.

This dynamic has taken precedence over the RVO's impact on trade flows in and out of the US, but particularly for imports.

US imports grow

The RVO has averaged about $6.65/bl through March and first-half April, including some of the highest levels on record. But it has failed to stop March imports from rising to multi-year highs.

The four-week average of gasoline and ultra-low sulphur distillates imports into the US at 1.14mn b/d in March and 1.39mn b/d in the two weeks ended 9 April, highs not seen since May 2019, data from the US Energy Information Administration (EIA) show. In particular, the 1.43mn b/d imported during the week ended 2 April was the high four-week average since February 2010.

Vortexa estimates also show US waterborne gasoline and diesel imports hit 1.23mn b/d in March, the highest level since at least April 2018. April imports so far tallied 960,000 b/d, the highest level since August 2019.

Most of these imports went to markets along the east coast, including New England, New York Harbor and Florida.

Meanwhile the country's gasoline and diesel exports have below the five-year averages in March and first-half April. This is partly because storm-induced price spikes in late February and March led to [narrow arbitrages](https://direct.argusmedia.com/newsandanalysis/article/2195745) out of the US.

RVO's diminished impact on imports and exports could also have resulted from evolving pricing mechanisms. The cost of RVO is increasingly being added into imports and discounted from exports, which creates a net zero effect for producers selling into, or suppliers sourcing from, the domestic or foreign markets.

By Chunzi Xu