East Coast refiners receiving more domestic crude oil by rail, tanker, and barge
During May and June 2018, the price difference between the U.S. benchmark West Texas Intermediate (WTI) crude oil and the international benchmark Brent crude oil was the widest since 2015. Unlike in 2015, when receipts of domestic oil into the U.S. East Coast, or Petroleum Administration for Defense District (PADD) 1, were transported mainly by rail, recent movements of domestic crude oil have been mostly evenly split between rail receipts from the Midwest (PADD 2) and tanker and barge receipts from the Gulf Coast (PADD 3).
Changes to U.S. crude oil transportation infrastructure in the past three years, such as expanded pipeline capacity out of the Midwest and increased availability of coastwise-compliant shipping in the Gulf Coast, have altered the costs of transporting crude oil domestically. The East Coast now gets far less crude oil by rail from the Midwest than in previous years, but receives similar quantities of crude oil by the combination of tanker and barge from the Gulf Coast. In April, the volume of crude oil transported via tanker and barge to the East Coast from the Gulf Coast reached 152,000 barrels per day (b/d), the highest level since July 2014 at 159,000 b/d. The volume of crude oil by rail to the East Coast from the Midwest was 107,000 b/d in April, a 351,000 b/d (77%) decline from its peak in November 2014 (Figure 1).
Because very limited pipeline infrastructure exists to transport domestic crude oil to PADD 1, East Coast refiners historically have imported most of their crude oil. For U.S. East Coast refineries, the Brent- WTI price spread helps determine when the additional costs of acquiring and transporting domestic crude oil to the East Coast can be overcome. Between 2011 and 2015, when the difference in price between domestic crude oil and foreign crude oil was significantly greater than it had been in previous years, refineries on the U.S. East Coast increased receipts of domestic crude oil, particularly by rail and domestic marine shipping.
As the Brent-WTI spread began widening to average $5/b in the first five months of 2018 and $9/b on June 1, East Coast refineries again increased their receipts of domestic crude oil, but in far lower quantities than in 2015. Domestic crude oil accounted for 18% of total East Coast crude inputs for the first five months of 2018, compared with 55% in the first five months of 2015, when the Brent-WTI spread also averaged $5/b (Figure 2).
Declining movements of crude oil by rail from the Midwest have been the result of new pipelines completed since 2015, which expanded the available options to move crude oil out of the region. These pipelines included the Dakota Access Pipeline from the Bakken fields in North Dakota to Patoka, Illinois, and the Energy Transfer Crude Oil Pipeline (ETCO) from Patoka, Illinois, to Nederland, Texas. The expansion of pipeline capacity increased the share of crude oil transported from the Midwest by pipeline from 65% of the region’s total domestic crude oil shipments in May 2015 to 88% in May 2018, reducing shipments by rail.
In addition, East Coast refiners responded to the narrowing Brent-WTI price spread by canceling or not renewing domestic crude oil supply contracts they had made in previous years. Crude oil shipments by rail from the Midwest to the East Coast declined from 431,000 b/d in May 2015 to 58,000 b/d in May 2018.
A buildout of new fleets of tankers and barges in the Gulf Coast has made shipping crude oil to the East Coast by water less expensive. Trade press reports indicate that a number of coastwise-compliant vessels were built in the past several years, helping to lower the costs of transporting domestic crude oil from the U.S. Gulf Coast to the East Coast compared with costs in 2015.
Going forward, the main factor driving increases in East Coast domestic crude oil receipts is expected to be the Brent-WTI price spread. In the August update of the Short Term Energy Outlook, the U.S. Energy Information Administration (EIA) forecasts the price difference between WTI and Brent will average about $6/b in 2018 and in 2019 (Figure 3).
U.S. average regular gasoline and diesel prices decrease
The U.S. average regular gasoline retail price decreased nearly 1 cent from last week to $2.84 per gallon on August 13, 2018, up 46 cents from the same time last year. Midwest prices decreased by almost three cents to $2.75 per gallon, West Coast prices fell over one cent to $3.33 per gallon, and Gulf Coast prices decreased less than a cent, remaining virtually unchanged at $2.59 per gallon. Rocky Mountain prices rose two cents to $2.94 per gallon, and East Coast prices increased slightly, remaining virtually unchanged at $2.80 per gallon.
The U.S. average diesel fuel price decreased less than 1 cent from last week to remain at $3.22 per gallon on August 13, 2018, 62 cents higher than a year ago. Midwest prices fell over one cent to $3.14 per gallon, Gulf Coast and West Coast prices each decreased by less than one cent to $2.99 per gallon and $3.71 per gallon, respectively, and Rocky Mountain and East Coast prices each decreased less than a cent, remaining virtually unchanged at $3.36 per gallon and $3.22 per gallon, respectively.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 3.4 million barrels last week to 69.8 million barrels as of August 10, 2018, 7.4 million barrels (9.6%) lower than the five-year (2013-2017) average inventory level for this same time of year. Gulf Coast, Midwest, East Coast, and Rocky Mountain/West Coast inventories increased by 1.9 million barrels, 0.8 million barrels, 0.7 million barrels, and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 4.2% of total propane/propylene inventories.
