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Feature: West Coast products strength pushes region into stark backwardation

Houston — West Coast refinery outages have pushed prompt refined products prices to multi-year highs, sending all markets into a strong backwardation through the summer as the area overcomes production issues.

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Around 557,000 b/d of West Coast refining capacity has been impacted by work this spring, including a handful of unexpected issues. But just one major refinery -- Phillip 66's 139,000 b/d Carson plant -- has yet to restart units from unplanned work.

The outages overall will likely be short term, as just 1.14 million b/d of distillation capacity will be under maintenance in June, compared to 1.83 million b/d in May, according to Platts Analytics.

The expectation that refineries will ramp up production, combined with supply relief from imports, has pressured cash prices for future delivery. Buyers are less likely to enter the spot market to secure supply when prices are backwardated, a scenario that has played out this week for gasoline.

Los Angeles CARBOB was assessed Tuesday at NYMEX June RBOB plus 20.50 cents/gal, the lowest level since March 22 when it was plus 17.75 cents/gal. That assessment was down 41.50 cents from its April 10 peak at futures plus 62 cents/gal, its highest price since January 2016.

Sources said trading has seemed more active lately for June and July delivery months than for May. On Tuesday, June was offered at July futures plus 16 cents/gal, while July was heard offered August futures plus 15.50 cents/gal.

The desire to trade future barrels has been in part spurred by supply offloading from cargoes that has yet to reach pipelines and storage tanks.

West Coast gasoline imports totaled 957,873 barrels the first 12 days of May, nearly double the amount from the same time frame last year, US Customs data showed.

STRONG RESUPPLY PICTURE

The West Coast refinery scene may not be near full strength, but the region's import picture is as strong as it has been since before the recession.

The latest Energy Information Administration data showed 155,000 b/d of gasoline was imported into the USWC, which also includes Hawaii and Alaska, for the week ended May 3, while 159,000 b/d was imported two weeks earlier. Those are two of the four highest weekly import levels since April 2007.

One market source said trading has been "sleepy" as refiners bring in the barrels. "There are a lot of cargoes filling most of the shorts out West, currently," he said.

Los Angeles gasoline prices, especially, have a history of spiking on refinery issues but deflating before the relief can actually arrive, which deters constant imports. CARBOB is also a stricter, California-specific grade of gasoline that few refineries can produce or want to make given the long lead times for refining and shipping. East Coast Canada and Milford Haven in England are two refinery spots able to make CARBOB, and each has sent ships to the USWC.

US Customs data showed the Torm Lotte arrived for Musket on May 9 into Long Beach from East Coast Canada, while BP brought in the Hellas Nemesis on May 11 into Bellingham, Washington, and Chevron the Astral Express on May 12 into Los Angeles. All were MR-sized ships capable of carrying 300,000 barrels or more. The last two loaded from the ARA storage complex in Europe.

Sources and Platts vessel tracking software cFlow showed at least four ships on the water started from the ARA and passed through the Panama Canal, while two cargoes from Asia were fixed with clean products. All were less than a week out from Los Angeles.

"There's a lot of that coming from the Continent. That's where the majority of product is coming from," a second source said. "The ships coming from Europe are gasoline."

Valero was bringing in the Topaz Express from Milford Haven, according to a shipping fixture. Fixtures listed the Horizon Armonia and High Current as carrying gasoline for ExxonMobil and Shell, respectively, each loaded with shipping options from the US East Coast down to Argentina and over to the USWC. There was no fixture for the fourth ship, the BW Lioness.

"They want to have the flexibility to sell into several different destinations ideally at the best price available for the timing of the vessel's arrival," he said. "And there's strong gasoline pricing on the USWC."

DISTILLATE PRICES DROPPING

The second source said the Asian product was leaning toward distillates as usual, adding that the SM Navigator was likely to be carrying jet fuel and the BW Leopard was a PetroChina fixture carrying diesel. At least two other ships just left Asia for the USWC, with fixtures citing jet fuel for Valero on the Star Falcon and Gulf Muttrah.

May barrels of California-grade ULSD in Los Angeles were assessed Tuesday at NYMEX June ULSD plus 34 cents/gal, unchanged day on day. The June swap was heard to trade at July futures plus 12.50 cents/gal, showing the market was backwardated by about 67 points per day.

The backwardation Tuesday for Los Angeles jet fuel was less steep but still significant. May barrels were assessed at June futures plus 22 cents/gal, unchanged day on day and down 10 cents from its week-ago assessment when it reached a four-year high.

Jet fuel for June was heard to trade at July futures plus 9 cents/gal, highlighting how shortlived the high prices were expected to last.

The STI Excellence, chartered by Valero, is set to deliver up to 472,800 barrels of jet fuel to the West Coast from South Korea, according to Platts data. That would be in addition to the 3.73 million barrels of jet that arrived in April, the largest one the month total since October 2017, according to US Customs data.

--Joshua Brown, joshua.brown1@spglobal.com

--Margaret Rogers, margaret.rogers@spglobal.com

--Matthew Kohlman, matthew.kohlman@spglobal.com

--Edited by Pankti Mehta, pankti.mehta1@spglobal.com