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Does the U.S. East Coast Face a Flood of Refined Products Imports?

Will traditional domestic and import suppliers maintain their historic market share?

November 16, 2010

During the third quarter of 2010, U.S. refining industry performance declined, relative to the prior quarter.  This decline was evidenced by lower overall industry crack spreads, combined with a narrowing of the light-heavy crude oil price differential (LLS-Maya).  Even the closing of several refineries, combined with seasonal maintenance turnaround activity, did not improve performance.  The overall decline between 2010’s second and third quarters follows a trend we highlighted in our last release - a reduction in crack spreads, beginning in May of this year.  October 2010 indicates performance continuing at levels very similar to those seen during the third quarter.
 
Baker & O'Brien, Inc.’s (Baker & O’Brien’s) third quarter 2010 release to PRISM™  subscribers indicates that overall 2010 margins are higher than last year, with U.S. third quarter 2010 cash margins improving in every district, except for PADD 1.  However, when compared against the previous quarter, refinery cash margins  have fallen, on average, by over $1 per barrel, with PADD 1 suffering the greatest drop in cash margin.  Results varied throughout the country, with results on the West Coast (PADD 5) showing the strongest performance with improvements of nearly $1 per barrel.
 
However, the poor performance exhibited in the PADD 1 refineries may possibly get worse, even after previous refinery shutdowns reduced PADD 1 refinery capacity by a cumulative total of almost 400,000 B/D (23%) since November 2009.  The diagram below illustrates recent PADD 1 Light Oil Product Import volumes.

Based on geographical proximity, refineries in Eastern Canada, the Caribbean, and South America can be considered “base load” suppliers, where the only practical market outlet for their excess production is the U.S. East Coast.  Surplus European gasoline also provides relatively large and steady import flows, notwithstanding recent refinery interruptions in France.  A developing threat to PADD 1 refineries is the growing import volumes from Asia, notably from the recently constructed Indian refinery and increased refining capacity in China, which may displace other imported barrels and generate additional volumes to compete with PADD 1 refineries.  Further pressure will be placed on the already low PADD 1 refinery margins once upcoming refinery expansions in PADD 3 are placed into production and are combined with the potential start-up of shuttered PADD 1 refineries.

1PRISM is Baker & O'Brien's refining database system that models the operational and economic performance details for all of the refineries in the U.S.
2 Net Cash Margin (Refinery EBITA), US$ per barrel.

PRISM is a trademark of Baker & O'Brien, Inc. All rights reserved.