2025 opens with fire and ice for US refiners

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Jeff Mower:

Hello and welcome to the Oil Markets podcast by S&P Global Commodity Insights, where today we'll be discussing the impacts of wintry weather and wildfires on refined products demand and refinery operations. I am Jeff Mower, director of Americas oil news and I'm joined today by senior downstream editor Janet McGurty, currently in New Jersey, and from Houston, refined products editors Sarah Hernandez and Jordan Daniel. Welcome everyone. It's been eventful New Year so far for Refined products in the US. We returned from the holidays to cover an Arctic blast across much of the country and devastating tragic wildfires in California.

The frigid temperatures have really helped boost distillate prices with NYMEX front month ULSD crack spread against WTI. It was trading around $28 a barrel earlier in the day, January 14th. The day we're recording this. In contrast, the RBOB gasoline crack spread was trading around $10 and 80 cents a barrel. Coming into the new year, US refiners were operating at pretty high run rates, although maintenance season is right around the corner. So Janet, I'd like to start with you on this. Tell us has there been an impact from the wildfires or the cold, the wintry freeze on refinery operations so far?

Janet McGurty:

We have seen some impact on refinery operations from the cold freeze for sure. We have yet to see from California wildfires. But on the cold season, we had two storms in a row. The first was Winter Storm Blair and the second was Cora. Okay. But then they went through the south and the Midwest and the east coast pretty much through the fifth, through the tenth, right. We had five days of it. We had flight cancellations, power outages, flooding and all that. So that did impact flight and gasoline demand. So S&P Global Commodity Insights analysts, they estimate that the five days of this winter storm activity caused about 9,000 flight cancellations, which they pegged impacted jet fuel demand by 20,000 barrels per day for the month of January. And the majority of these cancellations were in the Southeast and the Midwest. Now, gasoline was also disrupted by storms because when it snows, you don't drive. It slows down people driving and also there were highway closures as well, which limits people driving vehicle miles travel.

So they estimate that that demand loss could be 80,000 per day in January, but that could be made up in February as drivers simply take their discretionary driving, like if you were planning a trip and you put it off and they will push it to the back half of the month. So it'll be difficult to say on what happens there. Diesel, the same thing. It's cold this winter. Matter of fact, I was speaking to a spokesperson for one of the refiners and he said, "Oh, it's heating oil weather." And it is here in the Northeast. However, heating oil has lost a great share of its heating market share to LNG in New England. So that's kind of changed the volumes and demand. So they expect that colder than normal weather throughout the month will increase heating demand and will put demand 80,000 barrels per day higher than it was last year and about 70,000 barrels over the 10-year average.

And power losses also increase the use of diesel generators, so that's another plus for them. Now, California is really a different... As we know, uses its own fuel and it's hard for them to get it from other areas. So wildfires are still raging and the gusts of winds, that's really... Fans of flames and it's really been dangerous. According to CAL Fire this morning there were 135 wildfires burning, over 40,000 acres decimated, and 12,000 structures destroyed. And preliminary estimates put fatalities related to the wildfires at 23. The largest of the fires is the Palisades, which is just north of refineries in Los Angeles. There's five refineries there. They account for 1 million barrels per day, a little more of refining capacity, and that is two-thirds of California's state refining capacity. So we haven't seen an impact on supply yet because refiners have said that their refinery output is not impacted by wildfires. There's been no power issues. The only power issues we saw was with Kinder Morgan and two of their products pipelines and terminal, but that's been rectified in their back online, so we don't see any direct relation impact on the fires.

Jeff Mower:

And those refining pipelines, do they deliver refined products into California or out of it?

Janet McGurty:

No. Out of California. So one went to the CalNev, which went to Nevada and then there's the one, it's SFPP. I forget what that stands for anyway, but they deliver to Arizona. So it's taking it out. It's the terminal there and the pipelines take it out of California to places like Las Vegas and Phoenix.

Jeff Mower:

And I guess I'm saying it is cold and it's winter time, so maybe it's not too much for a surprise, but it's sort of unusually cold in Europe right now. I was just reading a story on the power front that French demand exceeded 87 gigawatts on January 14th for the first time in four years because of a big boost in heating oil demand or heating demand I should say. And that's something that has definitely lifted our gasoil prices, gasoil futures on ice as well as the dynamic ULSD. Inventories are okay if you look at like ARA's stocks of diesel and gasoil. For the week ending in January 9th, they were 34% higher than they were at the same time last year, so not terrible, but still it's sort of easy to draw down, I suppose. That's a concern.

And I think likewise on the Atlantic Coast, a lot of people look at the Atlantic coast because we'll still use some heating oil up here, and it's the benchmark, right? NYMEX ULSD is delivered in New York and we've got inventories around 13% below the five-year average. But again, that's not particularly unusual for that market, especially as you said, it's been sort of phased out over time. But I'd like to turn to Sarah next because we were talking earlier about the impact on propane LPG prices. So Sarah, what's the impact there? You were saying that the enterprise propane had closed at the highest since last February at least.

Sarah Hernandez:

Yes, LPG has been pretty liquid lately and activity on the market has been pretty steady for the Gulf Coast market, but also the Conway area. The Conway area, which is more closer to the Midwest relationship or closer to the Midwest market dynamics. In addition to the Midwest and the Gulf Coast, we have been following up what is happening in Canada, particularly in the Edmonton are and Sarnia area where we launched recently LPG prices back in November. We noticed it that temperatures have been particularly low, especially on the Northeast side in Canada and also in the US, significantly lower than they were last year at this time. Not just that, but we're expecting to see this continuing at least the rest of this week and the next one and very likely this is going to continue for another couple of weeks as well.

On the Southwest, we have been seeing that temperatures also are dropping not as fast and as in other areas, but still we are experiencing some chill weather lately. In the Northwest of the US and Southwest of Canada, we saw that the propane is the one that has been more active, butane has been more steady. Propane is directly related to the heating demand or demand for heating, and we reached out the highest level of prices that we have been assessing on the Western Canada. Recently, actually yesterday, we reached out prices is very similar to those that we had back in November, but still they still ramping up. However, in the Northeast is where the temperatures are getting lower and is where the more demand is needed.

Jeff Mower:

And so are you seeing more... You had mentioned exports have been strong. Explain that in other words. Is that just exports into Mexico?

Sarah Hernandez:

Yes, in part of Mexico, Mexico demand has been pretty strong. LPG exports to Mexico reached out a record high back in November and the trend continued also in December. And all this drive by higher demand in Mexico and also lower production there. This has been adding more support as well to the prices in the Houston area where Houston... Well, the enterprise propane actually closed yesterday at the highest level since February 2024. And one way to see the price of propane is when you compare this price against the WTI, the crude oil, right now we have a relationship between 46 to 48% between the propane and the WTI. While the last time that this radio was higher was on February last year when this ratio reached out 50%. And just as a matter of compression during the freeze that we had on 2021, this relationship reached at 70%. That means that if we continue seeing these temperatures as the weather forecast are showing, we could easily go back and see ratios as high as 70%.

On the other hand, we can see that butane is not actually so strong relative to crude oil, but it's more stable. Not just in Conway but also on the golf course site. However, in Canada, in Canada is reaching out at two month high. Butane for gasoline blending has been pretty active. But even when butane has been constantly used for gasoline blending, gasoline demand in general seems pretty depressed, especially in the Mid-Continent and the Atlantic coast. The Atlantic coast has been pretty quiet. The market is showing very slight contango even from flattish to even 20 points per day contango for the rest of the month. All demand has been focused on debt from barges one to three days out delivery, which actually we start assessing on April last year.

Then people say there that they are not expecting to see this demand ramping up in the near time because especially particularly because of the weather. And Southeast Canada and Northeast US are the regions which are showing the lowest temperatures and the lowest temperature forecast coming. Also, we noticed that that activity on the colonial pipeline related to gasoline was also involving more butane blending on the south, that means the Gulf Coast area, to ship more winter gasoline to the pipeline to reach out the Northeast. This is a little bit related to a reshape on the blending market. In the past, we used to see more butane blending in the Northeast or in the New York Harbor area. But this year, we are definitely seeing that most of the blending is happening on the south and they are already shipping the finished product or the blending product to the-

Jeff Mower:

To the Northeast.

Sarah Hernandez:

To the North.

Jeff Mower:

Why is that? Do you know what's caused that shift? I mean, so much of the product is piped up north anyway. Why not blend it further south or is it sort of an issue of butane availability?

Sarah Hernandez:

I think that there is a good amount of butane in the northeast. However, the Southeast, all the Gulf coast area has been really flooded with LPGs during this year because of the increase on crude oil and natural gas production. So it seems that the availability of butane here is good enough to make better profits than actually blending butane on the Northeast. We have been hearing butane pricing above the Gulf Coast for a couple of cents, two or three and even 4 cents lately. And something else that we noticed that was that the Line 3 space. Well, let's assess the line space value on the colonial pipeline. That is a measurement of how much the shippers are paying to move their products. It's an indirect measure that can give us an idea about how much rush a shipper has to ship their products or to move the products away from the Gulf Coast area.

When the line is positive, this means that they are paying more to be at the front of the line and then take advantage of the arbitrages or the market situations that are leading to this increase on prices. However, when the line space is negative, we interpret this as the contrary situation, like people prefer to keep their barrels on the origin area. Then the Line 3 space, which runs from Greensboro to New York Harbor and during the winter, Line 3 activity is well more associated with the distillate movement rather than gasoline. Last year at this time, shippers were paying up to 14 and a half cents to move their barrels at the beginning of the line.

That is they were in a big rush to ship their barrels to New York Harbor area. This year, this line space value has been a little bit delayed. People was expecting to see it again in a positive territory and even as high as last year, but it has not been the case. The Line 3 space moved to positive values only two days ago and we have been assessing it at plus one since per gallon since then. And maybe this will continue ramping up in line with more demand of distillates there. And Jordan can share a little bit more about this one. However, gasoline demand is definitely not there. Gasoline is more focused on CBOB, very little amount of RBOB trading there. And mostly, it's very flattish, the prices, especially on the Atlantic Coast because of the weather.

Jeff Mower:

So was the Line 3 space that you're talking about, is that for all products? I want to make sure I understand that.

Sarah Hernandez:

The Line 3 space, yes. Just on that specific line, distillates and gasoline can be shipped through the same line. Then when gasoline is not trading there, usually the distillates are the ones that are leading the movements on this particular cost. And when we see more activity on gasoline, then we can relate the changes on this value with the gasoline market.

Jeff Mower:

I understand. Thanks so much. Yeah. So Jordan, I know we were talking earlier about the impact on jet fuel demand. You had mentioned a lot of flight cancellations, touching on that a bit, but maybe if you could get into that a bit, what sort of impact is that having on jet fuel prices?

Jordan Daniel:

It's interesting when you look at jet fuel prices and jet fuel demand in January and February, the early parts of the year, you typically see a fairly sharp drop off from the holiday travel season. And if you look back at December when folks are traveling a lot for the holidays, demand was much higher than we've seen in recent years. But then you get into January and the school's back in session, there's a little bit less business travel going on. So as you might expect, demand kind of tails off a little bit. But if you look at, as Janet mentioned earlier, just a huge, huge number of flight cancellations, I guess it was last week due to the severe winter weather. You look at where the cancellations were, you look at Dallas-Fort Worth and you look at Atlanta and Charlotte, these are very large hubs that are not necessarily accustomed to severe winter weather.

So we saw cancellations climb up into the 75% of all flights coming out of those airports at times, not for extended periods of time or anything like that. And then there's a spillover effect. If a flight doesn't make it from Dallas to Chicago, then there's going to be more delays, more cancellations. So yeah, I definitely would expect sort of a short-term blip in a demand right there. But when you look at just the prices themselves, they're kind of... For jet fuel in particular, it's kind of doing what you would expect to do at this time of year. The differentials are fairly weak, not just on the Gulf Coast but also at New York Harbor. But as we sort of move into the spring, move into warmer weather just historically speaking, we would see these prices kind of start to tick up a little bit. But on the opposite end of the spectrum, we're looking at diesel prices, just the heating fuel in general, quite strong.

And a lot of that's tied to the NYMEX ULSD futures contract, which is pretty strong now. It's been rallying and obviously all of our sort of prompt pipeline assessments are tied closely to those. But you look at the Northeast US, sort of the New York Harbor area, it seems like the market for heating oil for sort of that red-dyed diesel that is used to heat homes, it's pretty liquid right now. In our e-window, we're seeing bids and offers come in every day that last several weeks. And our Diesel Editor, Aaron Tucker, he's been hearing a lot of indications just on that 67 grade heating oil. So it's been fairly liquid and it's not just in the New York Harbor, the US Northeast where it was mentioned, they'll use it for their generators and things like that. But you look into the Midwest and that ULSK is pretty strong right now. It's, I believe about 20 cents per gallon premium to the diesel, the prompt pipeline diesel that's being assessed there.

So demand for fuel to keep homes and buildings warm is very strong right now. And we're seeing that reflected in prices. I mean, typically this time of year, January going into February, prices get very strong and then usually around February, early February to mid-February, they'll peak. They'll kind of tail back as the weather warms up just a little bit. So we're still kind of following that seasonal pattern. That's very typical. And then when you look at the market structure right now we're talking about the market being in contango. Typically, that would disincentivize exports particularly from the US Gulf coast looking in northern Northwest Europe. But exports are still quite strong right now. The RBOB is still open. I was just looking at our RBOB flow report this morning. The RBOB is still open from the US Gulf Coast to the Northwest Europe for ULSD. And like Jeff mentioned, there's certainly plenty of demand in Europe for diesel fuel right now.

Jeff Mower:

Yeah, and we definitely... When I was looking at this little export from the EIA, it was like 1.4 million barrels a day. It's pretty strong recently. I know production is, not just Europe like you mentioned, but also in the Latin America, US distal productions are around 5.2, 5.3 million barrels a day. So still pretty strong, still going strong there. So I'm curious down the road though, a couple of things. One question for Janet. Janet, what's the outlook as far as refinery operations with maintenance coming up in the near future?

Janet McGurty:

We have a lot of maintenance coming up, especially in the Gulf Coast. We've got some heavy hitters down. We have like Motiva, Port Arthur. We have a Pascagoula, Marathon, Galveston Bay. So refiners are getting back to the more normal maintenance schedules that we're disrupted by COVID finally getting there now. So it's normal to have that kind of a... Because it is the shoulder season, which is between diesel demand and before gasoline demand kicks in, they like to perform their maintenance. So it's normal to happen, but we're going to see it pretty heavily this year for sure.

I mean, there's a lot of big plants going down in the Gulf Coast. Now in California... Back to the wildfires. So Los Angeles, there's a lot of work going on in the Los Angeles refinery is there too. So while gasoline demand is less from the fires, we say about 30 to 40,000 barrels out of what, 210 barrels per day of Los Angeles demand. Refiners, they're not pumping out as much as they usually do and we expect that they continue. So I know there's planned work going on and in the East Coast too, Delaware city, Trainer. So this is the time to refurbish, I guess, and get ready for gasoline season. So going to be a heavier maintenance season this year, I think, or this quarter anyway, the first half of this year, than it was last year.

Sarah Hernandez:

I think that what Janet mentioned about the coming maintenance on the Gulf Coast is pretty important because it's again about the transition to the gasoline season and the fact that we are seeing already the gasoline market in contango being referred to the gasoline transition and how we are expecting to see this higher prices by end of February, the beginning of March. And particularly in the Midwest where we are expecting a big shift that includes that 10 states are going to be shifting to lower RVP gasoline. That means that prices there could be more expensive. And all these market dynamics are going to be reflected on the maintenance that the market is talking about and how the prices are going to have to absorb and the end users are going to have to absorb all these increment of prices, as Janet was saying.

Jeff Mower:

Yeah. The other question I have. Yesterday, Alberta's Premier Danielle Smith came out and said... She had just met Trump at Mar-a-Lago and came out of the meeting saying, "You know what? We're still expecting tariffs." 25% tariff on imports, or I should say on Canadian exports. And that would include all the crude that Canada sends to US refiners. What's the expectation there? Are we going to see higher refined product prices? Would those higher costs be passed on to consumers, you think?

Janet McGurty:

Always. The consumer always pay. I mean, RINs regardless of what it is. People say, "Oh, RINs adds this cost." But when it comes down to it, the consumer is the one who shoulders that cost. So definitely, yes. We'll definitely pay more. It's going to go through. But I spoke to a refiner lobbyist in Washington a while ago and he said... He's very transactional and so this is his way of behaving. Everything's a deal with him. That's why we... The first chapter in Art of the Deal, he told me, and you'll understand him. So I think that's it. And he's also been talking about rolling back tariffs on other things. I think when we see it, we'll see it. I don't know. And that's kind of how I've been trying to approach it.

Jeff Mower:

Yeah, definitely. All right. Well, let's leave it at that. Thank you so much. Thanks, Janet and Sarah and Jordan for joining me. And thanks again to our listeners for tuning into this episode of Platts Oil Markets podcast. This oil markets episode was produced by Jennifer Pedrick in Houston.