Viewpoint: California to maximize EPA diesel, exports

California refiners are likely to prioritize export-grade diesel production in 2020 to capture greater margins amid growing demand in Latin America.

The pattern began in July when California refiners favored production of export-grade diesel, also known as EPA diesel, at the expense of the California CARB diesel, data from the California Energy Commission (CEC) show.

CARB diesel production fell by double-digit percentages from July to mid-December, according to the CEC. The week ended 9 August saw the sharpest production declines, with CARB diesel throughputs plunging to 122,300 b/d, less than half the amount produced during the same week a year earlier. EPA ULSD production grew to 220,000 b/d during the same week, 51pc higher than a year earlier.

The shift toward more EPA diesel corresponds with the grade's relative price strength to CARB diesel. EPA diesel rose to a narrower discount of 0.35¢/USG below CARB diesel from 1 July to 26 December 2019, compared with a 0.49¢/USG discount during the same period in 2018.

The price strength came from export demand, largely in Latin America. Waterborne diesel exports from the US west coast averaged 94,100 b/d from 1 July to 26 December, with 40pc going to Mexico, followed by Chile, Ecuador and Peru, according to Vortexa estimates.

The demand growth in Latin America is expected to continue next year, in part because the International Maritime Organization's (IMO) new 0.5pc sulphur cap on marine fuels is expected to drive demand for low-sulphur distillates.

In addition to the pull from Latin America, California's push away from fossil fuels is also likely to increase export flows.

Environmental regulations in California, such as the Low-Carbon Fuel Standard (LCFS) and clean vehicle rebate program increase demand for biodiesel and draw resources away from diesel production.

California's effort to increase electric vehicle use is also part of the state's plan to cut diesel emissions by 40pc by 2030. The state in September enacted a "Ditching Dirty Diesel" bill detailing those plans.

Implied demand for distillate fuel oil across the US west coast averaged 511,000 b/d during the third quarter of 2019, down by 10pc from year-prior levels, according to data from the US Energy Information Administration (EIA).

The rise in exports to Latin America partly offset the decline in regional demand, cushioning US west coast against historic volatility seen in the west coast gasoline market.

By Craig Ross