Crack whacked as surplus back

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With the U.S. gasoline market in a state of plentiful supply, the front month Rbob gasoline crack spread (the gauge for the profitability of refining gasoline) has dropped below $10/bbl (vs WTI) for the first time since early 2017. 

More-than-ample inventories have helped weigh on prices of late.  After spending the first half of the year at a deficit to year-ago levels, US gasoline inventories have climbed to a surplus in the last couple of months. 

Even though we have seen gasoline inventories draw in the last few weeks, they still remain above the top of their five-year range. In fact, they are at their highest level for the time of year since EIA records began in 1990. 

US gasoline inventories YoY

The rise in inventories hasn’t been due to a drop in gasoline exports: quite the opposite. Our ClipperData show that US Gulf Coast gasoline exports have outpaced year-ago levels in every month this year except June, picking up pace in the last two months after summer driving demand has dissipated.

Exports are averaging 160,000 bpd higher through the first 10 months of the year than in 2017- which equates to nearly 50 million extra barrels this year.

US Gulf Coast Gasoline Exports

If gasoline exports are rising and inventories are rising, shouldn’t we expect to see refinery runs growing as well? Yep, and we do. Through the first 43 weeks of the year, refinery runs have outpaced the weekly trailing five-year high over three-quarters of the time. (Last year isn’t the best benchmark for comparison given refinery disruptions due to hurricane impacts in late summer).

Refinery runs are averaging just a smidge below 17 million barrels per day so far this year, 220,000 bpd above the trailing five-year highs and 450,000 bpd above year-ago levels.

 crude inputs vs 5 yr high

With the back-of-an-envelope calculation, higher exports and higher inventories account for the majority of the higher volume of gasoline produced this year. This is affirmed by weekly gasoline product supplied numbers, a proxy for demand, which show consumption is up less than 1 percent this year versus last.

Looking ahead, a well-supplied U.S. gasoline market looks to persist for a number of reasons. A key reason is the need for more middle distillates as IMO 2020 appears on the horizon, with margins incentivizing refiners to produce as much ULSD as possible.

Another factor is rising U.S. crude production. As shale output continues to ramp up, the crude slate for U.S. Gulf Coast refiners is getting ever lighter, exemplified via a higher API. As refiners consume more light crude, they produce more of the stuff they don’t need (light ends, aka gasoline), while targeting the stuff they want (middle distillates):