“Changes” – U.S. Gulf Coast Petroleum Supply/Demand

By Elizabeth Hilbourn and John Auers

We’ve written a lot about the “shale boom” and how that, along with other factors, has increased the competitiveness of the U.S. refining industry.  Taken together, these major developments have significantly altered the supply/demand balance and trade flows of both crude and refining products in the U.S.   This is particularly evident in the nation’s (and world’s) largest refining complex along the U.S. Gulf Coast (USGC). It brings to mind David Bowie’s song, “Changes.“Still don’t know what I was waitin’ for And my time was runnin’ wild.”  “Ch-ch-ch-ch-changes.”  The following changes are rapidly taking place in the region:  (1) Product exports are rising, (2) likewise, crude exports have been increasing, (3) crude imports have been decreasing, and (4) refinery throughputs and utilizations continue to grow.  In all these categories new records are being set on a regular basis.   A couple of notable milestones were reached just this month where, for the first time ever, crude exports exceeded imports through the Port of Houston/Galveston and refinery throughput reached an all-time high in the PADD 3 (primarily USGC) refining region.   Incentivized by this changing environment, significant investment is being made in both the midstream infrastructure and refining systems on the USGC.  In today’s blog, we discuss the Ch-ch-ch-ch-changes” taking place and the facilities being added by the industry to support these “Ch-ch-ch-ch-changes.”

“I watch the ripples change their size”

Over the last two years, finished gasoline and diesel exports have steadily increased a monthly average of less than 1.4 to over 2 MMBPD and reached a record peak of 2.2 MMBPD in December 2017.  Monthly average crude exports have steadily increased since the beginning of 2017 from just 0.2 to 1.9 MMBPD.  Crude oil imports have been decreasing for some time, and May of 2018 averaged 2.68 MMBPD.  In fact, crude oil import into PADD 3 averaged 4.93 MMBPD in 2011.  Peak utilizations and processed crude oil have increased.  In fact, during the week of August 10, 2018, PADD 3 refinery utilization was at a high of 99.7% with record crude processing of 9.65 MMBPD.  All the previous crude input records are shown in the utilization chart below.  The previous three records were the weeks of December 29, 2017, at 9.47 MMBPD, May 25, 2017, at 9.45 MMBPD and the week of January 6, 2017, at 9.26 MMBPD respectively.  This high utilization is a response to strong domestic and international demand.  PADD 3 refiners, with their high complexity and abundance of coker capacity, continue to show a global competitive edge.  This is anticipated to continue, especially when the 2020 bunker fuel regulations come into effect.

“But never leave the stream”

The above figure shows how PADD 3 crude exports have been increasing while crude imports have been decreasing.  Since the beginning of 2018, crude exports out of PADD 3 have been close to the same level as Texas crude imports.  May of 2018 was the first month where the crude export average for the month exceeded the crude imports.  In May of 2016, only 25% of crude oil was exported from PADD 3.  In May of 2018, 94% of crude oil was exported from PADD 3.  May of 2018 is the month when total U.S. crude oil exports exceed 2 MMBPD.  Crude oil export infrastructure has been expanded at the ports of Houston and Corpus Christi, allowing increased export flows.  Crude oil export capacity is still limited in PADD 3 because most ports are unable to load larger crude oil vessels.  TM&C expects that crude exports will approach 6 MMBPD by 2022 once significant infrastructure is built.  We anticipate that in the future, some ports will be capable of loading Very Large Crude Carriers (VLCCs).

“So the days float through my eyes”

The figure below shows the make-up of crude imports into Texas.  The largest imports are from Mexico followed by Saudi Arabia.  The Venezuelan crude imports have reduced significantly since mid-year 2017.  Iraq, Colombia and Canada make up most of the rest of the crude oil imports.  The crude imported into PADD 3 is heavy crude.  It averaged 23.13 API in the period since January 2015 graphed below.  The refineries in PADD 3 are better configured to process heavier crude.  The exported crude is light crude and has mainly been shipped to Asia Pacific and European countries with some going to Canada.  The majority of Texas and North Dakota crude has API Gravity between 40.1 and 50.   In fact, if you plot U.S. crude production in 5 API increments, it follows a bell shaped curve with the center being mostly between 40.1 and 45 API Gravity and part of the center in the 35.1 to 40 API Gravity category.

“But still the days seem the same”

Crude oil exports have been critical to the growth of U.S. production since the U.S. refineries have their fill of the lighter crudes.  U.S. refineries, and in particular those in PADD 3 and 5, are more complex than the World’s refineries.  A number of expansions have already taken place to be able to process lighter crudes; however, much of the world, in particular in Asia Pacific and Europe, has an appetite for the lighter crudes.  Currently, two companies have proposed to build offshore export terminals to accommodate large tankers. Offshore export terminals will allow loading crude oil faster and more cost efficiently without the need for lightering vessels.   Mid-July of 2018, Houston’s Enterprise Products announced their plans to build a massive offshore terminal with a capacity of 4 MMBPD south of Galveston to export Permian, Cushing and Eagle Ford oil.  In early August 2018, Trafigura announced their plans for a U.S. deepwater oil export terminal with a capacity of 0.4 MMBPD in Corpus Christi, TX.  The timing of both of these terminals is uncertain.  These two recent announcements are not unexpected.  Most of U.S. crude oil is exported out of Texas of which there are three major port districts.  The largest is Houston-Galveston which comprises the ports of Houston, Galveston, Freeport and Texas City.  The second largest is Corpus Christi followed by Port Arthur/Beaumont.  The highest throughput of crude oil imports since 2015 came to the Port Arthur port at 750 MMBBL, the Houston port at 732 MMBPD, followed by the Corpus Christi port at 273 MMBBL.

TM&C constantly monitors changes and projected changes in pricing and supply and demand across the globe for all petroleum products.  Our projections take into account changing rules and regulations, technological advancements, production and transportation costs, demographics, changes in consumer behavior, and other factors impacting supply and demand.  We include our independent analyses of these impacts in our semiannual Crude and Refined Products Outlook and our various other studies. This subject is discussed in the release of our 2018 Mid-Year Crude and Refined Products Outlook (C&RPO) issued mid-August.  For more information on this report or on any of our other analyses or consulting capabilities, please send us an email or give us a call.