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Analysis: U.S. fuel export surge gives refiners surprise summer blockbuster

By Anna Louie Sussman and Jonathan Leff

NEW YORK (Reuters) - In the middle of July, U.S. refiners are normally doing a brisk business selling their fuel close to home, revving up output to meet peak driving demand.

This year, however, they are in the midst of an unprecedented summer surge in exports of gasoline, diesel and other fuels, as the combination of cheaper shale crude and record-high biofuel credit costs open up new markets overseas.

Refiners like Valero and traders like Vitol have raced this month to book more than 77 tankers to ship fuel from the U.S. Gulf Coast to Africa, Argentina and even Asia, nearly surpassing total bookings in all of July last year, according to data from shipbroker Charles R. Weber Company Inc.

It will be months before the full scale of the export boom becomes clear in official U.S. data, but it is already helping sustain a sharp run-up in U.S. crude oil prices to their highest in 16 months. Refiners, enjoying bumper profit margins on export sales, are running their hardest since 2005, drawing down U.S. crude inventories at the fastest rate on record.

Freight rates to ship the refined products have spiked.

"The idea of having rates higher in mid-July than at the end of January - it would be like selling more ice cream in Central Park in January than in the middle of summer," said Robert Bugbee, president and director of Scorpio Tankers Inc , which operates a fleet of 40 clean product tankers.

The surge may also intensify debate over two U.S. energy policies that are coming under increasing scrutiny: a mandate to blend biofuel into gasoline that refiners say is driving up the cost of selling fuel domestically; and trade policies that strictly limit crude oil exports while allowing unfettered overseas shipments of refined fuel.

U.S. gasoline is for the first time starting to replace European fuel in West Africa, a major importer. Naphtha has sailed to Taiwan for only the third time in a decade. Growing Latin American economies hindered by limited refining capacity are drawing more and more fuel from the northern hemisphere.

Meanwhile a one-third surge in the cost of ethanol credits this month, nearing $1.50 per gallon on Thursday, has given refiners more incentive to sell abroad, relieving them of the need to buy credits to meet biofuel requirements.

While it's uncertain how long the export boom will last, especially as U.S. crude costs rise relative to European markets, it is clear the shipments are the latest sign of an oil market in flux, as the surge in U.S. shale oil production rewrites the rules and redraws the routes of global trade.

New shipping routes are emerging "because of a fundamental shift in where oil's being sourced from," said Christos Papanicolaou, director of business development for Greenwich, Connecticut-based Charles R. Weber.

EXPORTS FUEL GAINS

U.S. crude hit a 16-month high on Thursday, narrowing the gap versus European Brent crude to less than $1 for the first time since 2010. The rally has been pinned largely on falling crude stockpiles as new pipeline capacity drains a glut of supply in the Cushing, Oklahoma, delivery hub.

But it is increasingly clear that fuel exports are playing a key role in the run-up, giving U.S. refiners the incentive to consume crude at full throttle. Analysts at Macquarie Capital estimate U.S. gasoline crack margins surged almost 50 percent last week, doubling on the Gulf Coast to $10 per gallon.

That explains why refiners are processing more crude than any time since 2005, even though consumption of refined fuels in the first four months of this year is down 13 percent from 2005, according to U.S. Energy Information Administration data.

On the Gulf Coast, refinery runs averaged nearly 8.5 million bpd, the highest level on U.S. government records dating back to 1992, and up nearly 400,000 bpd from June 14.

A TREND REVIVED

U.S. fuel exports are a relatively new feature of the market. After the 2008 financial crisis, the United States was left with a surplus of refining capacity thanks to declining demand, rising biofuel use and a wave of expansion. Fuel exports exceeded imports in 2011 for the first time in over 60 years.

The trend leveled off earlier this year, with exports down 5 percent through April. But it has revived abruptly in recent weeks, a time of year when shipments would usually ebb.

Over 100 medium-range tankers moving product from the U.S. Gulf Coast were booked in June, a two-thirds increase from a year ago, CR Weber data show. The 77 bookings so far this month could rival a peak of 130 in January.

Freight rates on tankers from the Gulf Coast to Europe <.BAHA> surged 50 percent from the start of June until last week. Rates have already begun to ease, although tankers booked earlier this month are only starting to load up the fuel.

"We have been expecting this U.S. export increase for a long time, that's been central to our strategy, but even we are completely blown away by the sheer voracity of this," Bugbee said.

"As recently as four or five weeks ago we had expected an increase in exports and improved rates, but from that internal report we are off by over 100 percent."

Exact figures won't be clear for months. Weekly EIA data only includes estimated exports based on historical trends, and official trade data is released two months in arrears.

Once the surge begins to surface it may draw unwanted scrutiny from Washington. At a Senate hearing earlier this week, Democratic Senator Ron Wyden of Oregon asked executives including Valero CEO Bill Klesse "why prices are so high here at home, when there is so much extra gas and diesel fuel that it can actually be exported.

RIN CITY

Klesse pinned much of the blame for high gasoline prices - which reached $3.99 a gallon for premium fuel on Thursday, according to AAA data - on the surging cost of Renewable Identification Numbers, or credits known as RINs.

Under a 2007 law mandating the growing use of biofuel in gasoline, refiners are required to collect enough RINs to prove they are meeting their requirement, which is equivalent to about 10 percent of their gasoline output this year. The secondary market for RINs has surged as refiners scramble to buy, fearing they won't be able to meet their blending targets next year.

But exported fuel is exempted from the requirement. At nearly $1.50 a gallon on Thursday, RINs add an estimated 15 cents a gallon to a refiner's cost on domestic sales.

"There is more of an incentive to send cargoes overseas ... when the cost of complying with that (renewable fuel) standard by keeping gallons here in the U.S. starts to soar," said Valero spokesman Bill Day. He said he was unable to provide specific volumes ahead of the company's earnings next week.

He said the company's estimate that it would have to spend up to $750 million on RINs this year was looking "optimistic."

There is also a strong pull on demand from Latin America, where investments in new refineries have lagged far behind the pick-up in demand from growing economies.

"I think this is a really durable trend," says David Kirsch managing director of research and advisory at Energy Intelligence Group. "Until you have the Mexican and Brazilian refineries completed you'll have two areas of really strong product growth continuing to pull from the U.S."

Short-term factors have sharpened demand. In the past four weeks, Ecuador's state oil firm has purchased 6 million barrels of diesel and 9 million barrels of gasoline to be delivered over the second half of this year as it shuts down its biggest refinery for prolonged work.

EUROPEAN SQUEEZE

The export surge is also linked to the new bounty of U.S. crude being pumped out of shale fields like the Eagle Ford, as well as the rejuvenated Permian Basin, which together have boosted Texas output by more than 1 million bpd in two years.

The crude has been a boon for Gulf Coast refiners not only because it is nearby, but also because of U.S. laws that prevent it from being sold abroad - helping keep a cap on prices. No such restrictions apply to refined fuels, however.

For that reason many companies see a bright future.

In May, Enterprise Products Partners said it was expanding its Houston-area pipeline and storage network to better accommodate fuel exports, including the loading of Panamax tankers in Beaumont by early next year and Aframax vessels on the Houston Ship Channel in mid-2014.

European refiners are on the losing end of that trade, suffering from a drop in consumption as well as a run-up in crude costs as Russia directs more oil to the east. Even the U.S. East Coast, once a reliable buyer, is a hard sell.

"I think Europeans are in for a tough slog over the next couple of months," said Alfred Luaces, senior director of research on global refining and product markets at IHS.

"The traditional market that imports - the East Coast - is very well supplied. They're having a hard time placing any extra gasoline and that really hurts them."

(Reporting by Anna Sussman and Jonathan Leff; Additional reporting by Matthew Robinson; Editing by Lisa Shumaker)

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