Fuel Focus, March 9, 2012

Drop in U.S. Gasoline Consumption

According to a recent ARC Energy commentary newsletter, there has been a sharp reduction in U.S. gasoline consumption by 389,000 barrels per day since the end of last year. The assessment of the decrease in gasoline demand suggests that Americans are perhaps driving less as crude oil prices rise, pushing retail gasoline prices up. However, other factors may be involved, such as better vehicle fuel economy, transportation substitution (cycling, public transportation, and electric vehicles), the recession and unemployment, forcing people to drive less.

Another interpretation, according to ARC Energy, is that the growing trend in telecommunication technologies, the rise in social media among the 30+ age group, and choosing to work and socialize online rather than commuting by car in the traditional way, all contribute to the decline in gasoline demand. However, ARC Energy concludes that, although the data indicate a decline in gasoline consumption, it is less clear as to what is causing the magnitude of the drop.

Source: ARC Energy, February 20, 2012

About Gasoline

Canadian gasoline consumption is over 42 billion litres per year. Gasoline is a sophisticated product with a demanding set of performance expectations that:

• Allow an engine to start easily when cold, warm up rapidly, and run smoothly in all conditions
• Deliver adequate power without engine knocking
• Work in vehicles to provide good fuel economy
• Generate low emissions and enable advanced vehicle emission control systems.

Source: Canadian Petroleum Products Institute

Reduction in U.S. Northeast Refinery Activity

Since September 2011, two refineries in the Philadelphia area and one major Caribbean export refinery supplying the East Coast have closed. In addition, Sunoco has announced plans to idle its remaining Philadelphia-area refinery (Sunoco Philadelphia) in July 2012 if no buyer is found. The three Philadelphia-area refineries taken together represented 50% of total East Coast refining capacity as of August 2011.

Refining capacity is available outside of the East Coast to replace products historically supplied by the capacity that has been or may be idled, including potential production losses from the Sunoco Philadelphia refinery, but transportation constraints may hinder the delivery of products to the Northeast in the short term. Ultra-low sulfur diesel fuel will be the most challenging product to replace as there are few alternative supply sources outside of the U.S. Gulf Coast. Transportation constraints may also hamper the movement of all replacement products through Pennsylvania and into western New York, areas currently supplied by pipelines originating in the Philadelphia area refinery complex. The industry may not be able to overcome all of the logistical challenges in the Northeast for a year or more, as infrastructure changes will be necessary to accommodate the changing product flows.

Source: EIA, Reductions in Northeast Refining Activity: Potential Implications for Petroleum Product Markets

How Differences Between North American and Global Crude Oil Prices Affect Canadian Gasoline Markets

The Fuel Focus Issue 19 of October 7, 2011, discussed how the choice of crude oil price used affects the calculated gasoline refining margin. This issue reviews the impact of the growing disconnect between prices for landlocked crudes, (such as West Texas Intermediate (WTI), and Canadian crudes, such as Edmonton Par) versus globally traded crude oils such as Brent.  In particular, we examine the implications for Canadian gasoline markets.

Historically, the benchmark prices for Edmonton Par, WTI and Brent were closely linked, and price differences (or differentials) between these crudes were minimal. For example, in 2008, both Edmonton Par and Brent prices averaged US$98 per barrel, while WTI averaged $99.64. Market events such as refinery or pipeline outages would periodically cause price differentials, but these were usually eliminated within months. 

The WTI price represents a crude type sold at Cushing, Oklahoma. Edmonton Par prices track WTI, as both crudes are of similar quality and are sold into the same geographic market area. In late 2010 and into 2011, crude oil inventories began to build at Cushing, reflecting increased oil supply (particularly from Alberta), and stagnant oil demand at Cushing.  This excess oil could not easily be transported out of the Cushing area, due to pipeline bottlenecks. This situation caused softening in WTI and Edmonton Par prices. 

In contrast, the conflict in Libya led to a reduction in global oil supply delivered by tanker ship from Libya. This, combined with strong global demand for oil to be delivered by ship (in particular, demand in Asia) resulted in upward price pressure on all globally traded, ship-borne crudes, such as Brent. 

The combination of these factors resulted in Brent prices averaging $128 per barrel in October 2011, while WTI was $100, and Edmonton Par was $99.  Stated another way, WTI traded at a $28 per barrel discount to Brent, and Edmonton Par at a $29 per barrel discount to Brent.  The level of discount has varied since but remains significant, and the difference between the price of North American and global crudes appears to be more structural than differentials in the past.

Edmonton Par, WTI, and Brent are all high quality, light sweet crudes.  Western Canada produces more heavy crudes than light crudes, with Western Canada Select (WCS) being a typical heavy crude blend.  Heavy crudes always sell at a discount to light crudes, as they are more difficult to refine into petroleum products.  Typically WCS sells at a $10 to $20 per barrel discount to WTI.  This WCS/WTI discount varies, depending on refinery outages and how much refinery capacity is available to process heavy crudes at any particular time (not all refineries can process heavy crudes).

WCS was trading at a US$38 discount relative to WTI on February 9, 2012.  While $10-$20 of this discount could be attributed to the difference in oil grades, the remaining $18 - $28 reflects pipeline bottlenecks from Western Canada.  Given growing Canadian heavy crude production, Canadian producers do not have sufficient pipeline capacity connecting to heavy crude-capable refinery markets.  This is driving bigger discounts between WCS and WTI. 

The above situations have implications for Canadian oil producers, refiners and consumers.  Note that Fuel Focus reports do not track individual Canadian refinery crude purchases.  Different refineries purchase different proportions of light and heavy crude feedstocks, and pay varying prices for crudes of different qualities.  However, in general, all Canadian refineries from Montreal eastwards purchase crude feedstock at prices influenced by Brent prices, while refineries west of Montreal are mainly paying for oil feedstock at prices more closely linked to Edmonton Par prices. 

For the week ending February 3, 2012, Edmonton Par crude prices averaged Cdn$89 per barrel (Cdn$0.57 per litre), while Brent prices averaged Cdn$112 per barrel (Cdn$0.70 per litre). This difference in crude feedstock costs partly explains why gasoline prices are lower in western Canada.  For example, in Edmonton for the week ending February 2, 2012, gasoline averaged $1.06 per litre, while prices in Charlottetown were $1.22 per litre (Note that provincial gasoline taxes in Charlottetown are also $0.07 per litre higher than in Edmonton). As shown on Figure 3 of the Fuel Focus report, retail pump prices tend to be significantly higher, on average, for eastern centres (Toronto to St. John’s) compared to western centres (Vancouver to Winnipeg).