U.S. distillate inventories fell to historic lows in August despite record-high crude runs and normal distillate production. A combination of record-level U.S. distillate exports in June, coupled with continued year-on-year growth in U.S. Gulf Coast (PADD 3) diesel demand, depleted supplies in the Gulf Coast this summer while pushing Central Atlantic (PADD 1B) stocks to unseasonably low levels, according to the U.S. Energy Information Administration (EIA). Typically, distillate stocks build in PADD 1B in the summer ahead of the winter demand season for heating oil. Genscape granular data on New York Harbor inventories, diesel demand, distillate exports and refinery utilization give insights into the reasons why
New York Harbor Distillate Inventories Dip Below Multi-Year Levels
New York Harbor diesel/heating oil storage levels remained unseasonably low throughout Summer 2018 as stocks posted predominately minimal inventory changes since early May. Distillate stocks for week ending August 17 (Week 33) were at the lowest level for the same week since Genscape began monitoring the location in November 2013. Despite the 1.182mn-bbl build the week ending August 17, inventories remained 4mn bbls below stocks one year prior. Capacity utilization for New York Harbor diesel/heating oil remained below 40 percent since early April. In comparison, capacity utilization averaged 55 percent for the same time-period in 2017, only dipping below 50 percent once, according to Genscape’s New York Harbor Storage Report. On a broader scale, PADD 1B distillate inventories fell to 22.1 bbls for week ending August 17, according to the EIA, the lowest levels for that week since 2000.
Refineries Running Full Out
The counter-seasonal drop in PADD 1 and PADD 3 distillate inventories, as shown in EIA data, occurred this summer despite all-time highs in U.S. refinery operating levels. For week ending August 17, Genscape reported total U.S. crude runs at 17.872mn bpd in its Refinery Stream Monitor product, just below the record-levels of 17.971mn bpd reported by the EIA for the previous week. On August 22, the EIA published total U.S. crude runs at 17.892mn bpd for week ending August 17.
The record high crude run for week ending August 10 equated to a 98.1 percent utilization rate for the U.S. and a 99.7 percent utilization rate for PADD 3, according to the EIA. PADD 3 primary processing utilization rates dipped slightly to 96.1 percent starting August 15, due to crude distillation unit (CDU) outages at Phillips 66’s 250,000 bpd Alliance, LA, refinery and the Shell’s 45,000 bpd St. Rose, LA refinery according to Genscape Refinery Monitoring.
Gulf Coast to East Coast Distillate Pipeline Economics Weaken
Rather than a refinery production issue, strong Gulf Coast demand, coupled with record-level U.S. distillate exports for the summer, contributed to the significant decline in New York Harbor and PADD 1B diesel/heating oil stocks this year. PADD 1B relies on PADD 3 for distillate supplies via pipeline since local refinery production does not meet regional demand. In the spring and summer months, PADD 1B distillate inventories typically rise amid lower shoulder season demand and steady movements from PADD 3 via pipeline.
This year, however, PADD 3 to PADD 1 distillate pipeline movements fell to the lowest levels since 2014 in March, April, as reported by EIA monthly data. In May, PADD 3 to PADD 1 distillate pipeline movements fell to 662,000 bpd, the lowest levels since 2012. PADD 3 to PADD 1 distillate pipeline flows appeared to be on track to fall below 2017’s low levels for this summer, given the recent decline in weekly PADD 1B inventories and relatively strong Gulf Coast ULSD (Ultra Low Sulphur Diesel) spot differentials relative to CME NYH ULSD futures.
This spread, which spot market participants track to see if the economics are favorable to move ULSD or heating oil to New York Harbor, narrowed to near parity at several points in June and July, and even rose to a premium to NYH ULSD futures on June 21. With a $2.05/gal tariff rate on Colonial Pipeline to move refined products barrels from Gulf Coast origin points to New York Harbor, PADD 3 distillate exports to PADD 1B did not appear to be profitable for several weeks in June and July, based on a July 1 Federal Energy Regulatory Commission (FERC) tariff. This likely led to reduced seasonal flows of distillate from the Gulf Coast to the East Coast, and ultimately, New York Harbor.
Permian Drilling Fuels Gulf Coast Diesel Stock Draws
In the Gulf Coast, strong levels of exports and strong year-on-year growth in regional diesel demand due to increased drilling activity, particularly in the Permian Basin, also eroded regional inventories this summer. PADD 3 distillate inventories fell to 37mn bbls for week ending August 3, the lowest levels for the first week in August since 2007. PADD 3 distillate stocks rose 100,000 bbls to 39.9mn bbls for week ending August 17, but remained at four-year lows, EIA data showed.
Distillates Shipping Out Instead of Flowing Up
U.S. distillate exports hit a record high of 1.836mn bpd for week ending June 22 and remained at seasonally high levels between 1.04 and 1.4mn bpd through the middle of August, according to the EIA. Most of these exports are sourced out of the Gulf Coast, destined for South America, Europe, Africa or Asia. U.S. distillate (gasoil and ULSD) exports to Europe and Africa have increased in recent months because of the distillate export boom.
June saw approximately 445,000 bpd, or 13.38mn bbls, of distillate leave the U.S. for destinations in Europe, Morocco and West Africa. This was up significantly from 293,000 bpd and 233,000 bpd monitored going east across the Atlantic for April and May, respectively. July’s U.S. distillate exports to Europe, West Africa and Morocco were down from June, but measured a healthy 356,000 bpd, while 327,000 bpd left the U.S. eastbound across the Atlantic during August as of August 21, according to Genscape’s European Waterborne Products Report.
Conclusion
Diesel demand in the Gulf Coast posted remarkable year-on-year growth in 2017 and 2018, reported by Genscape Supply Side data, linked to the resurgence in Permian Basin crude oil production. Regional diesel demand growth, coupled with strong export activity this year, has supported spot prices in the Gulf Coast relative to New York Harbor, eroded PADD 3 distillate stocks, and likely contributed to the reduced flows of distillate from PADD 3 to PADD 1. All these factors combined contributed to the abnormally low diesel/heating oil stocks in New York Harbor, leaving stocks well below normal levels leading into the winter, heating months.