Viewpoint: Low stocks underpin US asphalt prices

Many predicted the International Maritime Organization's (IMO) new sulphur mandate on shipping emissions, capped at 0.5pc from 3.5pc on 1 January, would redirect an unmanageable surplus of low-cost, high-sulphur resid into the asphalt pool. Price cuts have been weaker than expected, even as many shipowners have already transitioned away from the high-sulphur fuel.

Instead, the industry is poised to enter 2020 with limited residual output, lower imports and below-average stock levels, which should help underpin prices early in the first quarter. Refineries in the US and Europe have been switching to lighter, sweeter crudes in preparation for the new sulphur rules, reducing asphalt yield. Alongside the shift toward lighter grades, persistently high coker utilization and the expansion of coking capacity have also encouraged residue destruction.

Buyers seeking to mitigate downside risk from IMO ran down inventories, which bottomed in late November at 17.5mn bl, a five-year low, according to US Energy Information Administration (EIA) data. This compares to US inventory held in April, when weekly storage volumes peaked at a record high for any year at 34mn bl.

Those banking on sharp discounts after January may be disappointed if prices continue to track the supply tightness seen in late 2019. Gains have so far been contained to waterborne markets like the US Gulf and Atlantic coasts, but could soon have a knock-on effect on other regions. US Atlantic coast barge prices were up by $45/t in the last few weeks of 2019, and have been on an upward trajectory since November.

Traditionally, buyers have relied on a slump in road paving demand in the winter to snap up product at steep discounts, commonly known as "winter fill." But delayed restocking this year, coupled with strong coker yields, means buyers may soon encounter higher costs as winter fill demand climbs ahead of the 2020 construction season.

Prices hinge on long-haul trade, crude

Global trade flows will continue to have an outsized impact on US prices next year. Gains seen in early 2020 could be fleeting if lower US asphalt production is offset by enough imports from abroad.

Increased asphalt exports from the Mediterranean to markets in Asia-Pacific and the Middle East have so far curtailed product inflows to the US. With the US east coast structurally short of product, an ongoing reduction in imports from the Mediterranean or Canada may strain US refiners — particularly swing producers in the midcontinent — who have cut throughputs or must focus on refilling internal storage in the first quarter.

Supply will also be determined by how long coking margins are supported by the new marine regulations, and how much high-sulphur fuel oil (HSFO) bottoms freed up from the bunker pool make their way to US refiners with upgrading capacity.

This year, unexpected supply ramifications from provincial oil curtailments in Alberta, export pipeline congestion in Canada, Opec and non-Opec production cuts, and US sanctions against Iran and Venezuela have all squeezed global heavy, asphaltic crude supply. The latest round of deeper Opec and non-Opec output cuts, which come into force in January, is also expected to tighten supply.

By Maria Ahmad