Structural Shift In Fuels Trade To Gain Momentum

BMI View: We anticipate that rising liquids production combined with a ban on US crude exports will prompt robust 40% growth in the US' net fuels exports over the next decade, ensuring it becomes an increasingly important fuel supplier to the European, Latin American and Asian markets. In terms of consumption patterns within the US, we note that greater fuel efficiency will weigh heavily on motor gasoline demand. In contrast, diesel and liquefied petroleum gas (LPG) look set to benefit from rising demand by heavy commercial vehicles and the petrochemicals sector respectively.

The US is in the midst of a structural shift, from net fuels importer to exporter. Soaring domestic production combined with a ban on crude oil exports from the US has prompted refiners to begin ramping up refined product output. Meanwhile, although we anticipate an uptick in consumption, the trend toward greater energy efficiency will weigh on growth rates. Accordingly, we expect that this will prompt fuels net exports to grow by 40% between 2012 and 2022 to reach 1.7mn b/d. While we are not advocating energy independence for the US in our forecast period, as it will continue to import crude oil, albeit in reducing volumes, we do see the US becoming an increasingly important fuels supplier, primarily to Latin America and Europe, but also Asia. The cost advantages of US-produced refined fuels such as diesel could become particularly disruptive to the ailing European refining sector as the US exports gain market share.

Consumption Growth Set To Be Sluggish

While we have seen a surge in fuels consumption in 2013 on the back of base effects and optimism on the US' economic prospects, total US fuels consumption growth over the next decade will likely be at a much reduced rate compared to historic trends. Energy efficiency has a crucial role to play in this trend. Indeed, while motor gasoline will continue to comprise the majority of fuel consumption, its production and consumption will decline over the next decade, as consumers become more cost conscious and prices remain elevated.

Diesel Gains Ground
Refined Fuels Consumption Forecasts, 000s b/d (Left) and Share of the Total (Right)

That said, although we anticipate that sluggish motor gasoline consumption will temper overall growth, we stress that some fuels look set to expand more rapidly than others. Diesel (aka, distillate fuel oil) looks set to experience the strongest growth in the coming years, both in terms of domestic production, but also consumption and exports. According to BMI's Autos forecasts for the United States, commercial vehicles and heavy trucks (which typically have diesel engines) will be the segments that will grow the fastest in terms of sales. Moreover, even though we forecast that the price of Diesel in the US (as quoted in the New York hub) will be slightly higher in dollars per barrel that gasoline, new generation diesel engines have improved fuel economy in terms of miles/gallon (km/litre), in most cases estimated between 20% to 40% more mileage, therefore making diesel an increasingly appealing option.

Fuel Economies To Bolster Diesel
Diesel and Gasoline Production Forecasts, 000s b/d, and Fuel Price Forecasts at New York, US$/bbl

This view is further supported by recent oil and gas infrastructure developments. Namely, in the coming quarters, work will commence on the three refineries in North Dakota - the first greenfield refineries in the US since the 1970's and all of which will have a product slate primarily comprised of diesel and naphtha.

New US Refineries
Name New Capacity, b/d Status Select Construction - start Construction - completion Main Owner Products Slate Crude Input Infrastructure Crude Feedstock Products Destination
Fort Berthold Reservation 20,000 Under construction 2013 2015 Thunder Butte Petroleum Services Diesel, Naphtha, Gasoline Rail, Trucks Bakken Light Sweet Midwest (North Dakota)
Dakota Prairie Refining 20,000 Under construction 2013 2014 MDU Resources Group, Calumet Specialty Products Partners Diesel, Naphtha Rail, Trucks Bakken crude Midwest (North Dakota)
Dakota Oil Processing 20,000 Approved 2013 2015 Dakota Oil Processing LLC Diesel, Naphtha Rail, Truck Bakken crude Midwest (North Dakota)
Source: BMI Global Refining Database

When fully operational by 2015, the three facilities will produce a combined 60,000 b/d of diesel, and while the addition is small on the broader scope of the US products market, which measures 19.4mn b/d, we consider it a significant indicator of which segment the market is expecting demand to be.

Economic Revival Underpins Commercial Vehicle Sales
Vehicle Sales, y-o-y % Growth

Aside from diesel, we also see liquefied petroleum gases (LPG) as the other fuel likely to gain ground over the coming years, highlighting that propane is used increasingly as a feedstock alternative to natural gas for petrochemical plants around the world. We see Asia as a major export market for US LPG, which has already absorbed the vast majority of US LPG exports since 2012.

Diesel and LPG To Outperform
Gross Exports (Historical) by Fuel, Net Exports Forecasts by Fuel (Left), 000s b/d

This is reflected in the surging number of LPG vessel orders over 2013. Although vessel orders move in cycles, the chart below clearly shows that LPG is currently on an upswing, largely on the back of shippers looking to capitalise from rising demand and new supplies from the US shipped off to global markets. The expansion of the Panama Canal will also enable greater volumes to be shipped to Asia, especially Japan, who is the main LPG consumer in the region.

Cyclical Highs For LPG Vessel Orders
Number of Vessels On Order, Liquid Bulk, By Type
This article is tagged to:
Sector: Oil & Gas, Petrochemicals
Geography: United States

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