USWC refining margins supported by growing Southwest gasoline demand

Growing gasoline demand in the Southwest is supporting margins for US West Coast refiners as refined product pipeline operators look to increase product flow into Arizona, according to an April 17 analysis from S&P Global Commodity Insights.

US West Coast cracking margins for regional benchmark Alaska North Slope crude inched slightly higher, averaging $22.50/b without renewable fuel obligations for the week ended April 14, up from the $22.44/b the week earlier, according to S&P Global.

Arizona ranked fifth in the United States Census Bureau's top 10 states in population growth between 2021 and 2022, adding just under 95,000 people to reach a total population of 7,359,197 people in July 2022. The state has no petroleum refineries and depends on nearby states like New Mexico, Texas and California to fulfill its growing transportation fuel demand.

Much like California, its neighbor to the west, Arizona has strict gasoline specifications for environmental reasons requiring a boutique spec called AZRBOB, making California the dominant supplier of Arizona gasoline.

Los Angeles-area refineries supply refined products including gasoline to Arizona, with Marathon Petroleum's 131,000 b/d refinery located in the west Texas town of El Paso filling in the gaps.

According to most recent data, California's total gasoline production rose for the week ended April 7 to average just over 1 million b/d, according to California's Energy Commission Weekly Fuels Watch, as the state's refinery utilization begins to pick up as planned maintenance begins to wind down.

Crude inputs into the state's refineries averaged 1.72 million b/d for the week ending April 14, up from 1.34 million b/d for the week ending April 7.

US West Coast cracking margins for regional benchmark Alaska North Slope crude inched slightly higher, averaging $22.50/b without renewable fuel obligations, for the week ended April 14, up from the $22.44/b the week earlier, according to S&P Global.

But recent Platts price assessments show that the premium held by AZRBOB to Los Angeles CARBOB gasoline has continued to widen due to overallocation of the West Line of Kinder Morgan's Santa Fe Pacific Pipeline (SFPP) as California's own tight supply/demand has increased prices in that state.

For the week ended April 14, Platts assessed AZRBOB up 6.65 cents to NYMEX May RBOB, with an average weekly outright price of $3.106/gal. This showed AZRBOB's premium to Los Angeles CARBOB to a weekly average of 17.6 cents/gal for the week ended April 14, compared with the 14 cent/gal premium for the week ended April 7.

This puts the AZRBOB crack spread to ANS at $45.48/b for the week ended April 14, compared with the Los Angeles CARBOB crack spread to ANS which averaged $38.09/b, according to Platts assessments.

Arizona's strong demand for gasoline has main pipeline supplier, Kinder Morgan, looking for a way to increase supply.

As a result, Kinder Morgan on April 12 launched a binding open season for commitments to see if they had enough support to expand the East Line portion of Santa Fe Pacific Pipeline (SFPP) running from El Paso, Texas, to Tucson, Arizona in order to increase gasoline, jet and diesel products flows by 10,000 b/d to 12,000 b/d.

The open season began at 8 a.m. Central Time April 12, 2023, and it is scheduled to end at 5 p.m. Central Time on May 26, 2023 and is "scalable" depending on the interest shown by shippers, Kinder Morgan said.

VMT down, margins up

As gasoline demand begins to pick up across the country with the advent of warmer weather, supply constraints will be more severely felt in growing population centers like Arizona.

For the week ended April 15, overall retail gasoline demand on the US West Coast was down 0.4%, bucking the national trend which saw retail demand up 1.4% across the country.

But using vehicle miles traveled – a metric of gasoline demand in a specific state measured monthly by the Federal High Administration – the lower weekly gasoline demand could be a reflection of lower California demand. California's VMT fell 3.2% in February, the most recent data available.

This can be partly attributed to freakish storm which swept the state during the month. However, due in part to its growing population, Arizona's VMT rose 2.4% while New Mexico's VMT rose 3.1% in February, reflecting the growing demand in the Southwest.