London, 14 July 2011: Reuters

Strong growth in gasoline and diesel exports from the United States to Mexico, the rest of Latin America and the European spot market point to the continued weakness of demand at home.

Combined gasoline and diesel exports from U.S. refineries totalled 37.2 million barrels in May, the second highest on record, exceeded only by the 40.6 million barrels exported the previous month, according to customs returns.

In the first five months of the year, U.S. refiners exported a total of 177 million barrels of finished motor gasoline and distillates, up 55 million barrels (45 percent) compared with the same period in 2010, and a massive 127 million barrels (155 percent) compared with 2007.

Refined product exports are now equivalent to more than 4 days of U.S. crude imports every month -- confirming the emergence of the United States as a global refining and processing centre rather than just a point of endconsumption.

MERCHANT REFINING

Exports began to accelerate at the tail end of the boom and remained high through 2009 and 2010 as the recession dampened domestic consumption of fuel, especially gasoline. But most experts expected volumes to stabilise or fall as the recovery matured and U.S. fuel consumption rose.

Instead volumes have continued to rise (Chart 1).

http://graphics.thomsonreuters.com/ce/US-PROD-EXP1.pdf

On the gasoline side, most additional exports have gone to Mexico, where U.S. deliveries have almost tripled in the past four years, and are now running around 8 million barrels per month (Chart 2).

http://graphics.thomsonreuters.com/ce/US-PROD-EXP2.pdf

Destinations for distillate have been more varied, with substantial extra volumes bound for Mexico, Brazil, Chile and Colombia as well as the European spot market in the Netherlands, according to customs data compiled by the U.S. International Trade Commission (USITC).

Smaller, older refineries on the U.S. east coast are beset by high costs and thin margins; they continue to report very low throughput and operating rates. But their more modern and flexible counterparts on the Gulf Coast have emerged as significant players in the global refining and fuels market.

It has led to the emergence of a new breed of "merchant refiners" that process crude for export. Many observers assumed the phenomenon was temporary, but it now appears to be part of a more enduring structural shift.

The profitability of merchant refining is underpinned by the growth of ethanol and rising vehicle efficiency, which has cut demand for petroleum-derived gasoline at home, as well as by the weakness of the U.S. recovery and Gulf refiners' investment in units able to upgrade discounted sulphurous and acid crudes into a high proportion of highquality and value-added products.

As a result, complex refineries in the United States have joined newly built plants in India and China to fill the fuel gap left by bottlenecks and operating problems at older refineries in Latin America, the Middle East and the rest of Asia.

OBSOLESCENT ESTIMATES

Much of the strength in gasoline and diesel demand being attributed to U.S. markets in fact comes from emerging markets. But the U.S. reporting system is still configured from a time when the United States was a major net importer of both crude and refined products and exported only negligible volumes of specialised products.

The current system records production, imports and inventories in real time, but export data is only available with a two-month delay from customs returns. In the interim, the Energy Information Administration ( EIA) and outside analysts estimate how much of the volume of products that has disappeared from the system is due to domestic consumption and how much has been exported.

The system worked when exports were small and stable but has increasingly broken down as exports have become larger and more variable. It has systematically underestimated the rise in exports since 2007 and overestimated domestic consumption.

Most analysts hoped these errors would fall once exports stabilised or returned to "normal" levels. But it is now clear this has not happened. Greater variability in export volumes may now be a permanent feature of the merchant refining system.

The case for real-time reporting of exports is compelling. It could be mandated under existing laws, though physical traders would probably oppose greater transparency, and budget cuts may make it difficult for EIA to take on the extra reporting burden.

In the meantime, growing exports coupled with the antiquated reporting system, are causing significant overestimates in domestic demand.

From the surge in exports between March and May, it is clear that the U.S. market has already reached the threshold at which significant demand destruction takes place, and the threshold lies in the region of $90-120 per barrel, rather than the $120-150 some forecasters have predicted.

Ends --

By John Kemp, Reuters market analyst – for Commodities Now.

The views expressed here are his own.