Listen: A jet-setting summer crowns a new king of the barrel

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Richard Swann:

Hello and welcome to the Oil Markets podcast by S&P Global Commodity Insights where today we'll be talking about which refined products markets are hot and which are not here in the US this summer.

I'm Richard Swann. I'm the global director for clean refined products here at Commodity Insights. I'm here today with Matt Kohlman, the associate director for clean products in the Americas, and Jordan Daniel who heads up our middle distillate coverage in the Americas. Thank you both for joining me this morning.

Matt, perhaps I could start with you because I think the obvious starting point when we want to do a review of where the product markets are in the summer, the obvious starting point is gasoline, it's driving season. I don't think it's been the greatest driving season on record, but I'm hoping you can tell me a bit more than that about it. How strong is gasoline right now? Is it having a bad summer?

Matt Kohlman:

Not a bad summer, it's not a good summer. I think we could make some sort of trains, planes, and automobiles analogy if we wanted. I think these pandemic summers have shown us the value of having a diverse set of demand uses. Diesel kind of saved refineries the first couple summers. We've been at it for five years... This is a fifth year, and then gasoline picked up. Everybody started to want to drive again really big time, and so you had a couple of good summers, including last year was really big.

And then this year I think people are wanting to fly again, so that's kind of the picture that you have, and as people are flying more, they're driving a little bit less, and driving demand isn't really bad. If you judge it by gasoline demand, it might be a little bit worse than usual, but you're seeing some... I think a lot of people, our own analysts have said you're seeing some pickup on driving demand in the use of EVs and more efficient cars, and I think that's just starting to play into the whole picture right now as well as there is a little bit less driving demand this year.

Richard Swann:

It's really interesting. It's like the first time perhaps we're starting to see that we can't just equate driving demand with gasoline demand. They're not necessarily going in a linear fashion now because of EVs taking a chunk of that market. That's interesting. Is that consistent nationally across the different markets?

Matt Kohlman:

Fairly consistent. I think the place we're really seeing the most, I guess, demand destruction is probably in the West Coast. Your prices... You can see it in the prices. We publish prices for Los Angeles CARBOB, which is a California specific gasoline, and they're lower than they are historically this time of year. If you look at it in terms of outright prices, yeah, they're still relatively high. It's California, they're always high in California because of taxes and everything like that.

But at the spot market where we look at these bulk area where 25,000 barrels trades off a ship or out of a refinery, out of storage and doesn't have a home yet, that's where you can really see the market, and that is, it trades against the NYMEX RBOB futures, which is a gasoline kind of futures, and it's trading below that now. It doesn't usually happen in California. If you go back before the pandemic, it's really not... especially this time of year in the summer where there's a lot of demand, but now it's happening and it's trading. They have a lot of refineries coming back. They're really in good shape with the refineries. Their demand isn't as great for probably the whole host of reasons you see everywhere, especially though they're one of the more fuel efficient areas.

Richard Swann:

That's pretty weak, isn't it? How about for the premium gasoline, if you want the high octane grades, is that still a much more valuable product?

Matt Kohlman:

Not as much as the last couple of years. Last few years across the US you saw very wide octane dislocations, I guess you could say. Let's say take the Gulf Coast this year, the difference between the premium and the regular grades, the difference between filling up your Kia and your BMW basically was last year was about 34 to 40 cents in terms of the spot market. If you actually go to the pump, it might be as much as a dollar or something difference, but in terms of the spot market, that's pretty big, and now it's about 20 to 25 cents except in the Chicago area. For some reason, the Chicago area, the gasoline is cheaper there for regular and much more expensive for high octane premium gasolines.

Richard Swann:

Interesting. Jordan, perhaps I could bring you in here then, if gasoline not really lighting any fires, let's say in terms of price action, not having the strongest summer ever, is diesel king of the barrel?

Jordan Daniel:

No, no, I don't think so. It is kind of a similar picture for diesel that it is for gasoline. We're kind of seeing it's not a hot summer, it's not a cold summer, it's just demand is basically right in line with what we saw last year for diesel. Our analysts noted pretty recently that it kind of seems like the Gulf Coast is sort of doing the heavy lifting as far as demand goes. The East Coast, the Atlantic Coast, fairly weak pricing and fairly weak demand, weaker than you might expect for these huge population centers over there.

And Matt mentioned sort of California being a little unusually weak for gasoline, and it's fairly weak for diesel as well. I think it's 15 cents lower. The outright price for Los Angeles diesel is 15 cents lower than it was the same time last year, and I think, yeah, from the highs we saw earlier this year, Los Angeles diesel is about 50 cents a gallon lower than it was then.

Richard Swann:

It's a big drop. Is renewable diesel eating into the California market there? Is that what we're seeing?

Jordan Daniel:

Yep. It's taking a huge bite out of a sort of traditional diesel share of the market. I think it's well over, not well over, a little bit over 50% of the market now is renewable diesel, and I think as a result of that, we're hearing that maybe some exports from the West Coast or heading south into Central and South America.

Richard Swann:

For diesel, and so I'm always curious about the exports piece as well. Export demand, especially from the Gulf Coast is a big factor in the overall balancing of the market. Are the exports strong?

Jordan Daniel:

Yes, they've been quite strong. I think the end of June, we saw the highest exports of diesel from the Gulf Coast in almost two years. And it's interesting too because in the past before the Russian invasion of Ukraine disrupted the whole energy market in general, we would see a lot of that Gulf Coast diesel heading down to Brazil, but now we've seen Russian product make its way to Brazil, and the US Gulf Coast is becoming a very key supplier for Europe. We've seen the arb from the Gulf Coast, not just to Northwest Europe, but also to the Mediterranean, has been open quite frequently. It's open earlier than it usually would. We're kind of hearing it might stay open later than we would see in the summertime.

Richard Swann:

Okay. Well, maybe let's look somewhere else then. If neither gasoline nor diesel really the two king products, biggest parts of the barrel really neither one really showing great strength. Matt, I think you alluded to this in your opening comments about from a consumer point of view, we're flying again, we're flying more. Flying obviously translates quite quickly into jet fuel demand. Jet not as big a market as diesel or gasoline, but sometimes key profit driver nonetheless for refiners. Is jet where the strength really is then, Jordan, at the moment?

Jordan Daniel:

It seems like that is the case. We just saw a report, the TSA said 3 million US passengers, they screened on Sunday, July 7th, so yeah, that's the most there's ever been. The TSA said that eight of the biggest 10 screening days in the US history have been in 2024, so it seems like demand is very, very strong. We got the implied demand data from the EIA, over 1.8 million barrels a day for the past couple of weeks, so very, very strong. Obviously, the July 4th long holiday weekend was a big driver of that. And then we just saw a few minutes ago as we were walking in here, US jet fuel production reached an all time high, over 2 million barrels a day. So it seems like it's interesting too because it didn't really dim diesel production. Distillates production was still quite high, but jet fuel production reached levels we haven't seen before.

Richard Swann:

And how's that playing out? I know in some markets, I don't know if it's true in all parts of the US is jet over diesel in most of the regional markets?

Jordan Daniel:

When we look at our benchmark Gulf Coast assessments, I think yesterday, jet fuel was one and a half cents stronger than diesel was, and then if we looked at the same time last year, diesel was 11 cents more expensive per gallon than jet fuel. So clearly there's a lot of strength in jet fuel. People want to fly. We're hearing that international travel is sort of a big driver for demand right now. Obviously, domestic travel during the July 4th holiday is quite big, but yeah, international is big, not just for the US, international travel into and out of South America as well has been a big driver.

Richard Swann:

Is this just something we should expect to be a summer phenomenon though? Would diesel, you think, assert some sort of supremacy over jet again come the fall?

Jordan Daniel:

I mean, that's what we usually see. We'll see sort of a peaking of jet fuel demand July and August. Summer travel season, everyone's going on holiday, and usually around September, mid-September, that's what we saw last year at least, demand for jet kind of falls off, it gets a little cooler and maybe diesel demand picks up a little bit.

Matt Kohlman:

I think Jet is coming up back to the historical norms. I think people are just finally getting back to where they were before the pandemic in Jet, and it's not just like they want to fly more, they do. I think it's kind of also that the airlines have their stuff back together after four really tough years for them. They have the people they need, they put on a lot of flights, and with that you're seeing a lot more supply than you have in the past four years. Frankly, they're back up.

I know everybody always complains about air travel. It's probably one of those great binding things of society to complain about how bad air travel is, but just in terms of having enough flights and being able to get people to places, we're at a place where we haven't been in a long time, and in fact airfare prices are lower than last year too, which kind of helps that demand. Whereas like I said, the gasoline demand for the last couple of years has been really good for the last couple of summers. And maybe people are just done with traveling to their close by aunts and uncles and stuff like that and they want to go see Tahiti instead this year.

Richard Swann:

Can't say I blame them, can't say I blame them. All right. Well, gents, I think that wraps it up for today nicely. Matt, Jordan, thank you both very much for joining me in this conversation today, and thank you to our listeners for tuning in.

If you like the episode, please be sure to leave us a rating or a review on your favorite podcast player. If you'd like to know more about anything we discuss today, please get in touch as well. We're always happy to continue the conversation. This Oil Markets episode was produced by Jennifer Pedrick here in Houston.