The US asphalt market appears set to start the next paving season in a supply surplus with the pending restart of Cenovus's 49,000 b/d refinery in Superior, Wisconsin.
The Superior refinery could begin operations before the end of this year after an explosion and fire in April 2018 took the facility off line. Prior to the explosion, the facility was shipping about 500-600 rail cars of asphalt per month of mostly PG 58-28 and PG 52-34, according to market participants.
Once up and running, the refinery will likely prioritize supplying its retail terminals in Wisconsin and Minnesota over railing asphalt to the wholesale market. Asphalt from Superior will eventually find its way into some midcontinent storage tanks, but a large portion will likely move west and possibly north, given its geographic location and utility of softer asphalt grades in the Rocky Mountains and Canada.
Even without the restart of Superior, persistently cheap heavy crude will help US asphalt to a supply surplus.
The differential between front-month WTI Houston and heavy Western Canadian Select at Hardisty has hovered around $30/bl since the beginning of the fourth quarter. This has incentivized refiners to run heavier crudes, which results in additional asphalt production. The differential settled at $28.13/bl on 13 December, likely guaranteeing at least another few weeks of heavier crude runs as refiners work through their crude inventories.
Apportionment for December also rose to 11pc along Enbridge's heavy crude pipelines moving volume to the US from Alberta. Heavy crude flows to some Midwest refiners were recently interrupted by a leak along TC Energy's 622,000 b/d Keystone Pipeline. The portion taking crude to Cushing, Oklahoma, will possibly be off line for months to come, but the pipeline's leg carrying asphalt to Wood River and Patoka, Illinois, restarted operations on 14 December.
Lower asphalt prices and elevated coker yields are also reflecting the abundance of asphalt in the market. The price of waterborne asphalt in the midcontinent and Gulf coast were assessed by Argus on 9 December at $300-$325/st and $325-$335/st, respectively. These prices are currently towered over by Argus-calculated coker yields in the two regions at 432/st and 385/st, respectively, and showcases the weakness of asphalt values relative to other products.
The relative value gained from coking asphalt rather than selling it has been driven by the shortage of gasoline and especially distillates in the US. In theory, this should incentivize refiners to maximize their asphalt coking, but refiners have had incentive to coke as much as they can for months, meaning refiners would have to use other methods to dial back their asphalt production. They could do this by changing crude slates or pulling back run rates, the incentives for which are growing.
The price of WCS on a short ton basis held above the price of railed and waterborne asphalt in the midcontinent through most of November, indicating refiners were losing money on their asphalt, which eats into refiners' distillate margins. Crack spreads have also taken a hit as gasoline prices have fallen off, and at least two asphalt producers are planning to cut runs in the coming weeks. While these factors could tighten the asphalt market, it is unlikely they undermine the overall softness in the market moving into next year.
US asphalt inventories were at 23.2mn bl the week ending 9 December, 12pc above the five-year average, according to US Energy Information Administration data. During peak paving season in June, asphalt inventories were 5.6pc below the five-year average.
