America has its mojo back, and it’s not just from energy shots and energy drinks. There’s a new energy boom, and it’s one that is sustainable and may achieve something politicians and diplomats have long sought: energy independence.
With the rising combination of Canadians hale and domestic production of “super light, super sweet” crude, the United States over the next decade should successfully wean itself off Middle Eastern product. This is the message of many experts, including OPIS publisher and fuels expert Tom Kloza, who at the NACSState of the Industry Summit shared his insights via his unique blend of Adam Sandler humor and respected industry acumen accumulated over decades of studying the petro markets.
“We’re going to see much, much more production,” Kloza said, predicting barrels will grow by 4.6 million barrels per day (BPD) by 2020. His forecast calls for U.S. production over the next seven years to jump by 3.1 million BPD to 8.8 million BPD and Canada’s by 1.5 million to 4.5 million BPD.
And there is opportunity for fuel marketers and retailers to exploit market volatility and dips. “There is a lot of leverage[to be had] if you can buy smart,” he said. “Volatility is your friend, but is your friend who arrives at your door drunk and ready to vomit.”
In other words, assess the risks that accompany the rewards.
Changing Markets
Mark down last October as a month to remember. That’s when prices of Canadian bitumen—which Kloza describes as peanut-butter-thick, sour crude—plunged as low as $49 per barrel before rebounding to around $80 earlier this year.
Sparking the volatility and depressed prices is America’s surging domestic production. Specifically, North Dakota, Texas and Colorado are emerging as crude heartthrobs. North Dakota’s Bakken shale formation—an extensive patch of oil-rich rock two miles deep—has propelled the state to No. 2 in crude-oil production, behind Texas. The success is buoying construction of the first new refinery in the United States since 1976, thereby allowing North Dakota to refine locally rather than transport its product to the Gulf Coast.
The good news is high production in North America should create greater stability of gasoline supplies in the United States. “Gasoline should really be a surplus product seven to eight months out of the year,” Kloza said, citing possible aberrations based on region. But there could be some challenges as well:
Bottlenecks: As reported in The Wall Street Journal in April, while there remains strong demand by U.S. Gulf Coast refiners for Canadian heavy crude, the glut of U.S. super-light, super-sweet crude is dominating pipelines and storage facilities, meaning that refiners—not producers—will gain the upper hand in dictating product and price.
Production: Certain fuels will win and others could face diminishing demand. Kloza expects diesel, a favored form in Europe, to be the big loser. “You’re going to see a lot less diesel,” he said, attributing diesel’s loss to massive output of the super-light, super-sweet gasoline. In his observations of U.S. refining trends, Kloza predicted that in addition to diesel, residual fuel and jet fuel will decline, making exports more difficult. At the same time, he pointed to record profits for domestic refiners in 2012, and expected the U.S. refining industry to continue investing tens of millions of dollars to accommodate higher productions of light feedstock’s.
How will this play out? As an example, Kloza examined the breakdown of crude types in 2011 vs. projected share in 2020 inPADD 3, which represents the Gulf Coast region, including Alabama, Arkansas, Arkansas, Louisiana, Mississippi, New Mexico and Texas.
The big shift, he said, will be in superlight, super-sweet: Its market share from 2011 to 2020 will spike from 11% to 20%, eating into light sour and light sweet. “You in the room,” he said to mostly convenience retailers and some fuel marketers, “fear supply shortages. But refiners fear too much gasoline.”
Inventory Levels
Shifting attention to just-in-time inventories—the strategy of limiting excess supply—Kloza offered some caution. While it’s true that better management of supplies could help stabilize one’s pricing, Kloza compared the strategy to a “Bay offend distribution system.”
Based in Nova Scotia, the Fundy tides are the highest in the world, making it tourist attraction and one of the world’s great natural wonders. Basically, twice a day the bay fills and empties billions of tons of water during each tide cycle, affecting roughly 175 miles of shoreline from the southwest shore of Nova Scotia to the head of the Bay, where the tide can peak at more than 50 feet in the Minas Basin.
That may be exciting to view, but applied to fuel inventory management, it could be disastrous. As Kloza pointed out, “Shallow product inventories are quick to fill, but also quick to empty.” And just as shallow waters are vulnerable to tides, shallow product is susceptible to large price swings, potentially heightening market volatility.
‘RIN-Sanity’
A subject aimed more at gasoline marketers and refiners is RIN, or renewable identification number. Under the federal renewable-fuels program, fuel marketers must produce a set amount of renewable fuel or purchase RINs. Controversy struck in late 2011 when theEPA fined several operators for purchasing fraudulent RINs, even though the companies believed the RINs were legitimate. Toward that end, SIGMA and other fuel-marketer advocates have pushed for Congress to clarify the definition of RINfraud.
Kloza at SOI addressed another RINrelatedconcern he dubbed ‘RIN-sanity.’“This is a really, really big deal,” he said. Particularly, the cost of buying waiver credits for failing to produce sufficient ethanol under the renewable fuels programs going up. Forecasting to 2014, he said, “We are on a collision course with not enough RINs to be in RFS compliance.”
Kloza expects refiners to pass on their RIN costs to the spot and rack prices, thereby driving up prices and, as he predicts, “having a great impact” on gasoline crack spreads. Still, Kloza doubts the EPA will intervene unless it stirs up real economic harm.
“Even if RINs reach $3 a gallon this spring,” he said, “that might not push U.S. gas prices to record levels.”
Kloza Calls ‘Em
OPIS publisher and analyst Tom Kloza offers the following predictions:
- America Gets Crude: North America will have much cheaper crude than the restof the world this decade. Natural gas is a game changer.
- Bingeing: Buying in bulk on large buying downdrafts will give fuel marketers asignificant advantage. The key is leveraging volatility.
- Hot Spots: Even the best of predictions can be rendered obsolete based on international affairs, especially as it relates to North Korea, Iran and the Middle East.
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