Latin America is growth market for US refiners

Aug. 1, 2011
Latin American refinery expansions planned this decade will not be enough to stem the region's growing dependence on imported US fuels, said analysts at Deutsche Bank AG (DB).

by Sam Fletcher, Senior Writer

Latin American refinery expansions planned this decade will not be enough to stem the region's growing dependence on imported US fuels, said analysts at Deutsche Bank AG (DB). Structural growth in US-Latin American trade for gasoline and gas oil will continue, with an increasing role for these exports in the US oil balance and US margins, they said.

While oil markets have focused on expanding Asian demand—particularly China—Latin American demand growth is shaping not only the oil balance for the Americas but also global fundamental dynamics, said Soozhana Choi, head of Asia commodities research at DB. Latin America's oil demand growth averaged 3.8% during 2006-08. But in 2010, the region's demand growth averaged 4% year-over-year, "a sharp recovery from 2009 when the region's oil demand fell 0.7%," she said.

Latin America's demand growth is expected to average 3% in 2011 and 2012, moderating from the 2010 recovery but still above the 10-year average. DB officials expect Latin American economic growth to "normalize" in 2011-12. Choi said, "Healthy economic growth in the years just prior to 2009 and now post-2009 has in good part been driven by structurally higher prices for raw materials, of which the region is a major global producer and exporter, including many key energy, metals, and agricultural commodities."

In Brazil, the largest Latin American economy, commodities represent 65% of the country's total exports. "Income growth in Latin America, aided by fuel subsidy regimes in one form or another, has in turn translated into brisk rising domestic oil demand. This is clearly evidenced in robust car sales," she said.

Demand exceeds refining capacity

DB said 1.5 million b/d of refinery capacity (distillation basis) is scheduled for construction in 2012-17, including 1 million b/d capacity to be built in Brazil. However, state-owned Petroleo Brasileiro SA (Petrobras) may allocate less funding to downstream in favor of boosting upstream investment. Choi said even if all refinery projects proceed as planned, the region will grow increasingly short of gas oil and gasoline.

"Gasoline demand, which represents 30% of the region's total oil demand, has been growing consistently in the past several years, even in 2009," she said. "Year-to-date, Latin America's gasoline demand is up 5.4% year-over-year, certainly strong relative that of the US, where demand growth year-to-date is down more than 1% year-over-year." Demand for gas oil, representing one third of total Latin American oil demand, is up 4.4% year-to-date, while US demand for distillates is flat.

Because of weaker demand growth in their home market, US refiners have surplus refinery capacity and production available for export markets with Latin America being the destination for half of all US oil exports. "Mexico is the destination for 20% of total US exports, and 10% is sent to Brazil, Argentina, and Chile combined," Choi reported, adding, "The growing importance of exports to the US refined products balance is reflected in that exports now represent 15% of total US refinery production, up from 6% in 2002."

She said, "Since 2007, we have seen a threefold increase in combined gas oil and gasoline exports to Latin America. Brazil's diesel imports have been trending higher in the past several years and have more than doubled in 2010 to 155,000 b/d since 2006. Brazil's growing diesel demand prompted the country to add biodiesel to their transportation fuel mix with soybean as the main feedstock. Brazil's mandate is expected to rise from a 2% blend in 2008 to a 5% blend in the next few years," she said.

Brazil became a net gasoline importer in first-half 2010 due to ethanol supply constraints that led to pricing imbalances; ethanol prices are not controlled, while gasoline prices are regulated. "A similar situation looks to be developing this year given expectations for declining sugar production, which may prompt the government to reduce the ethanol blend into the gasoline supply pool from 25% to as low as 18%," Choi said.

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