Feature: USGC refined products turn to Jones Act ships amid saturated markets

Houston — US Gulf Coast refined products market players have turned to Jones Act shipping in recent weeks as they seek an outlet for gasoline and ultra-low sulfur diesel barrels amid saturated markets.

A combination of high Gulf Coast stocks, high freight rates curtailing exports from the USGC, a hungry US Atlantic Coast market, and allocation announcements on Colonial Pipeline have set the stage for less-conventional movement of product.

Multiple ships have been heard to be lifting ULSD and gasoline from the Gulf Coast to Florida, which has become a strong option for refiners on the Gulf Coast looking to ship excess product out of the region. The lower Atlantic region of the East Coast has seen a swift and sudden build inULSD stocks, which totaled 12.66 million barrels for the week ended January 17, up 2.15 million barrels from the week ended January 3, US Energy Information Administration data showed.

The Jones Act tankers heard to be carrying either product on the route were the Texas, Ohio, American Liberty, Overseas Houston, and Lone Star State, sources said.

"Desperate times call for desperate measures," a USGC source said.

The Texas sailed from Fort Lauderdale on January 24 and arrived outside of Port Arthur Monday, according to cFlow, Platts trade flow software.

The American Liberty left Tampa on January 24 and is now anchored outside of Galveston. The Overseas Houston left Tampa on January 25 and is now outside of Port Arthur. The Lone Star State left Fort Lauderdale on January 22 and is now sailing toward the Gulf of Mexico north of Cancun. Lastly, the Ohio arrived in the Port of South Louisiana on January 26 after sailing from Fort Lauderdale on January 23.

A Jones Act shipowner said the ships were likely relets from major oil companies, including Valero, P66, Seariver, Shell and Motiva, who had these ships on time charter, as the spot market for Jones Act vessels had virtually disappeared.

"These are all on time charter by the oil majors, so why don't these companies just use them?" the shipowner said.

A second market source said Jones Act freight has climbed to 16-17 cents/gal, or lump sum $2-2.1 million basis 300,000-barrel Medium Range cargoes, an 88% increase from 7-8 cents/gal earlier in January.

According to the shipowner, "16-17 cents/gal or $2-2.1 million lump sum makes sense for MR Houston to New York voyage."

"How else are folks going to get the IMO-compliant marine fuels to Fort Lauderdale, Miami, Tampa, etc. to put on all those cruise ships, cargo vessels and more?" one trader said.

OVERSATURATED MARKETS

Regional stocks of the products have remained at historic highs, according to EIA data released Thursday. Total stocks of gasoline in the region continued to build, hitting their highest levels since the EIA began tracking inventories the week ended January 5, 1990. USGC gasoline inventories saw a 970,000-barrel build to 95.3 million barrels for the week ended January 17, the data showed.

ULSD stocks saw a slight draw last week after reaching a two-year high the previous week. Stocks totaled 39.15 million barrels for the week ended January 17 – 479,000 barrels below the previous week, the data showed.

"Refiners need to man up and cut runs," a market source said. "But their attitude is let the other guy cut runs."

The surplus of stocks has pressured markets, with Gulf Coast ULSD reaching over a one-year low on January 15 when S&P Global Platts assessed the market at February futures minus 11.25 cents/gal. This marked the lowest level since December 21, 2018, when Platts assessed it the same differential.

Conventional unleaded 87 gasoline on the Gulf Coast averaged a discount of 3.25 cents/gal to the NYMEX February RBOB futures contract in the past 10 days, a 44.6% decrease from the previous 10-day average of futures minus 2.24 cents/gal.

CBOB averaged futures minus 7.59 cents/gal in the past 10 days, a 21.24% decrease from the previous 10-day average of futures minus 6.26 cents/gal.

HIGH TIDE FOR FREIGHT

Regional stocks have increased as Gulf Coast freight has made it uneconomical to export the road fuels. The ULSD arbitrage from the USGC to Northwest Europe has been shut since October, reducing trade flow on the backhaul USGC-UK Continent route to term barrels or to "must moves and have-to moves," industry sources said. S&P Global Platts Analytics' Refined Product arbFlow Friday showed the diesel arbitrage from the USGC to Northwest Europe firmly shut at minus $2.05/b and at minus $2.47/b to disports in the Mediterranean basis 38,000 mt.

Since the start of 2020, the cost of shipping a 38,000-mt cargo of clean petroleum products to the UK Continent in a USGC-loading Medium Range tanker has risen 57.3% to $38.24/mt as of Friday, from $24.31/mt on December 31. By comparison, freight for a 60,000-mt cargo on the run increased 5.2% to $30.49/mt Friday from $28.99/mt on December 31, Platts data showed.

The stark cost increase has been driven by strong Americas clean tanker freight markets, where shipowners have been successful in fully factoring in higher bunker costs associated with the switch to 0.5% sulfur bunker fuels on January 1 from 3.5%S fuels as mandated by the International Maritime Organization.

In the ex-wharf Houston bunker market, 0.5%S marine fuel oil averaged $268/mt above 3.5%S fuel oil, or a 78% premium since the start of the year, according to Platts data.

With freight rates curtailing international exports, more refined product was shipped on the Colonial Pipeline to the US Atlantic Coast since the start of the year, resulting in allocations of the pipeline.

Rising Atlantic Coast ULSD prices come as Colonial Pipeline's distillates-only Line 2 was allocated for the first nine cycles of 2020.

In addition, Colonial Pipeline also announced Line 3 cycles 8 through 10 from Greensboro, North Carolina, to Linden, New Jersey, have been allocated as well. During an allocation, excess product is not able to be moved up the pipeline, and Gulf Coast refiners have had to look for other avenues to move product.

"Can only stuff so much into pipelines," the first market source said.

Burgeoning stocks and limited options have led Gulf Coast refiners to find other ways to send ULSD to the stronger Atlantic Coast.

On the USAC, product coming off the Colonial Pipeline in Linden, New Jersey, remained well supported.

Conventional grade gasoline coming off the pipeline in Linden was assessed at February futures plus 4.25 cents/gal Friday, 7.85 cents/gal above its Gulf Coast counterpart.

Platts assessed ULSD off the Colonial Pipeline at February futures minus 55 points/gal Friday, down 5 points day on day and 7.65 cents above Gulf Coast ULSD.