Over the past 10 years, increased refining activity and flat demand in the Midwest (Petroleum Administration for Defense District (PADD) 2) have allowed PADD 2 refiners to meet a larger share of the regional gasoline and diesel fuel needs. As a result, shipments of gasoline and diesel into the region have declined, while shipments to other regions have increased. Favorable product price spreads, infrastructure changes and abundant cost-advantaged crude oil have facilitated the shift in net shipment patterns.
Despite these changes, the Midwest is still typically a net receiver of gasoline and diesel fuels from other U.S. regions, especially during the summer driving season and refinery maintenance.
Midwest net receipts of gasoline and distillate (ultra-low-sulfur diesel (ULSD) accounts for approximately 98% of the distillate) fell from 1.0 million barrels per day (b/d) in 2006 to 500,000 b/d in 2016. The decline in net receipts is driven primarily by a fall in gross receipts from the Gulf Coast (PADD 3), rather than an increase in shipments to other regions. Midwest gross receipts fell 444,000 b/d from 2006 to 2016 compared with a relatively small increase of 79,000 b/d shipped from PADD 2 over the same period. The increase in shipments from the Midwest is largely drive by shipments to the East Coast (PADD 1) (see Figure 1).
On a monthly basis, net receipts are characterized by a high degree of seasonality, which is reflected in regional differences in spot market prices. High price spreads in neighboring regions encourage the movement of petroleum products. In the winter months (December – February), Chicago prices have been discounted compared with the Gulf Coast and New York Mercantile Exchange (NYMEX) prices, encouraging product movement from the lower-priced Midwestern markets to the higher-priced Gulf Coast and the East Coast markets.
Over the past 10 winters, Chicago spot gasoline prices have traded at a discount of less than 5 cents per gallon (/gal) below Gulf Coast prices, while it has traded at a nearly 11 cents/gal discount to NYMEX prices (Figure 2). These price differentials help explain the stronger growth in shipments from the Midwest to the East Coast and the smaller growth of shipments from the Midwest to the Gulf Coast.
In the summer months (June – August), however, the price spreads narrow and the Chicago price is often greater than prices in New York or the Gulf Coast. During the 2016 summer, Chicago prices averaged 2.2 cents/gal above NYMEX prices and 5.2 cents/gal above Gulf Coast prices. Chicago prices have been consistently higher than Gulf Coast prices over the summer for the past decade. However, 2015 and 2016 were the first summers since 2012 during which Chicago prices were higher than NYMEX prices.
The Chicago-NYMEX spread is less consistent compared with the Chicago-Gulf Coast spread and may not be indicative of all transportation opportunities from PADD 2 to PADD 1. The Pittsburgh area, which is in PADD 1, acts as a balancing point for product supply between PADDs 2 and 1. The availability of low-priced crude in the Midwest may encourage product movement between these areas, and shipments from PADD 2 to Pittsburgh may still be economically viable even if transportation to New York is not.
The development of the Canadian oil sands and light, tight crude oil in the United States have provided refiners in the Midwest with abundant, cost-advantaged crude oil, providing opportunities to optimize crude slates, expand refinery capacity and sell to a wider geographic market, thus shifting movement patterns between the three regions. From 2006 – 2016, operable crude oil distillation refining capacity increased by 356,000 b/d and gross inputs to refineries increased by 310,000 b/d. At the same time, Midwest demand for gasoline and diesel fuels remained flat. As a result, the region needs far less supplemental supply from other areas.
Significant barge movements of transportation fuels take place on major inland waterways in the Midwest, namely the Ohio River and Mississippi River systems. In 2016, PADD 2 received an average of 34,000 b/d of gasoline and distillate by tanker and barge from PADDs 1 and 3, while shipping 41,000 b/d back to these regions by tanker and barge. Significant volumes of transportation fuels also move into and out of the region via pipeline.
The primary pipelines connecting the Midwest and Gulf Coast are the Explorer, Magellan and TEPPCO systems. Over the past 10 years, increasing movements from the Midwest to the Gulf Coast and decreasing movements in the opposite direction reflect increased Midwest self-sufficiency. From 2006 – 2016, movement by pipeline of gasoline and distillate fuels from the Midwest to the Gulf Coast increased by nearly 22,000 b/d (46%). Over the same period, movements by pipeline from the Gulf Coast to the Midwest fell by over 339,000 b/d (48%).
The primary pipelines connecting the Midwest and the East Coast are the Colonial, Plantation, Buckeye, Sunoco and Marathon systems. From 2006 – 2016, movements of gasoline and distillate by pipeline from the Midwest to the East Coast increased by 41,000 b/d (up from the small base of 3,000 b/d), while movement in the opposite direction fell by 18,000 b/d (6%). The shifting patterns in gasoline and distillate movement has led to an excess of product pipeline capacity, prompting the idling or repurposing of several pipelines in recent years.
In 2013, TEPPCO reversed and repurposed one mainline transportation fuel pipeline to carry ethane to PADD 3 and no longer delivers fuels on its remaining south-to-north mainline beyond eastern Indiana. In addition, both TEPPCO and Explorer Pipelines are using excess capacity to ship condensate to Western Canada for use as a diluent in oil sands production.
The Centennial Pipeline has essentially been idle since mid-2011, and its operators are considering reversing and repurposing the pipeline. The recently added Sunoco Allegheny Access pipeline has helped facilitate movement from the Midwest to the East Coast, and the proposed reversal of the Laurel pipeline, part of the Buckeye system, could allow further increases in the flow of products into PADD 1.