Imports of gasoline into the US from Europe, notably to the US East Coast, are probably only going to recover only if the continent's economies visibly claw their way out of the ongoing global recession.
It may seem counter-intuitive that exports of an economically-sensitive product like gasoline would rise as a region recovers. Conventional wisdom is that exports of such a product would increase only in reaction to slumping domestic demand.
But generally, European refiners see gasoline as a by-product of their refineries' operations, which are configured to produce predominantly distillates. Distillates, specifically diesel, command a much larger market in Europe, unlike the US, which is more gasoline-centered. Therefore, excess gasoline produced at these European refineries is then exported to the other markets -- including the US -- depending on where the best economics lay.
Some 15 months ago, when the recession began taking its toll on economies, European refiners began adjusting their plant rates downward in tandem with the slowdown in local European demand for distillates. This in turn curtailed gasoline output, limiting available supply to the US market.
The bottom of the market, according to the Energy Information Administration, came in August last year, when total gasoline imports into the US East Coast fell by more than half the usual volume to reach 4.7 million barrels. So far this year, total imports into this region have risen, but still pale in comparison to a region where imports typically have ranged between 8-12 million barrels each month.
Even so, the import declines, while associated with less demand from the US, are viewed more as a function of less available supply coming from across the Atlantic, rather than significantly reduced demand in the US market. European refiners' plant adjustments have not only affected distillate supply, but also supplies of gasoline.
Distillate demand remains paltry in Europe, despite recent headlines touting that Germany and France are out of the recession. The market sees the little buying that is continuing in the European distillate market not as a reflection of real demand from goods and services, stemming from an economic recovery. Rather, they see the buying as being fueled by those who still have access to credit and want to put that to use for storage plays in the distillate market, which remains in contango.
Distillate demand is expected to only recover once the jobs situation in Europe improves, but not just a little; it would need to be more than that. Nobody is putting much stock in an increase in demand driven by strength in the equity markets. "Distillate demand is driven by GDP (Gross Domestic Product)...the economy," for Europe, said a trader. And looking at the way the economies have been behaving, it may be well into next year before real demand improves in Europe for distillates.
So until distillate demand in Europe improves, refiners there will see little need to increase refinery runs, which would be the only way they can increase their gasoline supply. Another way would be for European refiners to try to increase their yield of gasoline relative to distillates, but there is limited wiggle room for doing that; European refiners have cast their lot with engineering targeted at distilates.
For refiners to adjust their slates and engineering, gasoline prices on the US East Coast would need to jump high enough to blank out the losses that would accompany a loss of market share in distillates. The market is a long way from that now.
According to Platts assessments for August 17, 2009, 87 octane gasoline prices in the New York Harbor (NYH) market were at 190.03 cts/gal, compared with the comparable premium unleaded gasoline prices in Europe (FOB Rotterdam) at $196.21 cts/gal. So that's with New York gasoline more than Europe, hardly an incentive to export from Europe to the US. By contrast, earlier this year at one point, prices for the two regions stood at about 107 cts/gal in New York and 91 cs/gal in Europe, which is far closer to the norm.
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