FEATURE: USAC 2021 gasoline imports exceed pre-pandemic levels on strong demand, backwardation

Gasoline imports into the US Atlantic Coast in 2021, largely from Northwest Europe, surpassed pre-coronavirus pandemic levels on strong demand, weak regional inventories and pandemic-driven market dynamics, though imports weakened towards the end of the year.

Multiple lockdowns and increased pandemic-related restrictions in Northwest Europe curtailed gasolinedemand there, leading exporters to look to that key USAC market to absorb excess barrels.

The European gasoline market maintained a strong relationship to crude oil off the back of gasoline supply tightness throughout 2021, with the Northwest European gasoline crack reaching highs not seen since mid-2019, which was supportive in maintaining an open arbitrage. According to some Europe-based traders,a high European gasoline crack makes it easier to work the trans-Atlantic arbitrage and secure a profit.

"Gasoline imports have been a key rebalancing driver for supply in the USAC," said Lenny Rodriguez, S&P Global Platts Analytics manager- oil price and regional outlooks. "The arbitrage incentive for spot cargoes from Europe to New York Harbor has been consistently open over the last several weeks in a range of around $1-$3/b.

Tightening of the gasoline market in winter, however, saw the usual seasonal contango structure replaced with steep, persistent backwardation that discouraged storage in Europe and allowed for exports that would ordinarily be stored.

"Unlike ARA diesel cracks, gasoline cracks in the region have been within historical ranges for most of 2021, posting exceptional strength in the fourth quarter," said Rebeka Foley, oil market analyst-Europe with Platts Analytics. "Uncertainty over mobility has made it a lot harder to make sure output matches demand, leading to supply/demand imbalances."

Soaring natural gas prices at end-2021 saw European refineries enforce widespread run cuts to improve margins, which limited supply and supported the market there, as pandemic-relatedrestrictions increased, also leading to the lessened supply to the USAC.

"Surging gas prices have added constant pressure to reduce runs for some refiners facing higher operating costs," Foley said. "This has contributed to a healthy gasoline market, with ARA gasoline cracks expected to stay supported into 2022."

Implied demand

In 2021, US implied demand of finished motor gasoline, measured as product supplied, trailed below 2020 levels through most of March before demand surged, according to Energy Information Administration data. In the week ended April 9, 2021, implied demand was 76% higher compared to the same week in 2020. From March 20-May 28, weekly demand averaged 44.5% above 2020 levels.

Demand remained healthy ranging from around 5%-20% higher on a week-by-week basis for the rest of the year, and 12% overall for 2021.

"Since the third quarter 2019, the USAC refining capacity has shrunk by almost 400,000 b/d," Rodriguez said. "That has limited local refined product output and increased the call on imports not just from foreign origin (Europe, Canada and elsewhere) but also from the US Gulf Coast.

"In 2020 gasoline demand collapsed, inventories increased, lessening the overall impact of the refinery losses," he said. "However, in early in 2021 the 'Texas freeze' limited product supply, followed by a substantial demand pick up over the summer which triggered PADD I inventory draws and the need for imports increased."

An analysis of US Customs data showed that around 190 million barrels of gasoline products arrived on the Atlantic Coast in 2021, compared with 143 million barrels in 2020 and 182 million barrels in 2019.

Driven by soaring demand and low regional inventories, monthly import levels into the USAC rose as high as 23.1 million barrels in May. Imports began surging in March at 16.4 million barrels, which was a 44% increase compared to February, and then remained above 14 million barrels a month through September.

Heavy backwardation and low inventories

In contrast to 2020 inventory levels which were above the five-year average for 33 weeks, or 63.5%, of the year, 2021 regional gasoline inventories were at or below the five-year average for 40 weeks, or 77%, of the year.

Similar to Europe, the USAC gasoline market saw heavy backwardation which kept inventory levels low as the market operated in a "hand-to-mouth" fashion.

High naphtha and butane prices, driven by petrochemical demand and an unusually cold winter across Asia, narrowed blending margins for regular RBOB and CBOB which perpetuated low inventories.

Northwest Europe supplied a majority, around 41%, of imports into the USAC, followed by 24% from elsewhere in North America and 13% from the Mediterranean.

The Netherlands was the largest Northwestern Europe exporter into the USAC, accounting for 42.3 million barrels, or 53.6%, of that volume. Following was the UK at 13.9 million barrels, or 17.6%.

Of the 25.3 million barrels of Mediterranean imports, Portugal supplied 34%, or 8.6 million barrels; Spain supplied 28%, or 7.1 million barrels; and Italy supplied 6.3 million barrels, or 25%.

Canada was responsible for the totality of North American imports, which were at 46 million barrels.