U.S. Refineries Returning from Maintenance

Total stocks of crude oil and refined products in commercial storage across the United States dropped for the second week running last week, the first back-to-back fall since May, according to the U.S. Energy Information Administration (EIA).

More than 1.4 million barrels per day (bpd) of refinery capacity is still offline for routine maintenance and upgrades after the end of the summer driving season.

Turnarounds have contributed to the accumulation of crude inventories but resulted in a big draw down in stocks of refined products including gasoline and distillate fuel oil.

Stocks of crude rose by 2.8 million barrels in the week ending on Oct. 30, and have increased in each of the last six weeks, by a total of almost 29 million barrels.

Crude stocks are now nearly 103 million barrels, about 27 percent, higher than they were at the same point last year ("Weekly Petroleum Status Report" published on Nov. 4).

But the stock of refined fuels has fallen for seven consecutive weeks by a total of 25 million barrels, or about 500,000 bpd.

Gasoline stocks have fallen more than 8 million barrels over the last four weeks while distillate stocks have been down for seven consecutive weeks by a total of more than 13 million barrels.

At the end of the summer there were widespread predictions that the United States was headed for a glut of refined products once the driving season finished.

But the threatened oversupply has not materialised as refineries have successfully matched runs with lower seasonal demand.

The total surplus of refined products over prior-year levels has remained steady at around 95 million barrels since August (http://tmsnrt.rs/1WybFpE).

CHEAPER DIESEL
The increase in product stocks is concentrated in propane (22 million barrels) and distillate fuel oil (21 million barrels) with smaller rises in finished gasoline (14 million barrels) and gasoline blending components (13 million barrels).

Proportionately, the surplus is much larger in propane, where stocks are up 28 percent, and distillates, up 18 percent, than gasoline, up just 6 percent, and blending components, up 7 percent.

The result has been a big counter-seasonal shift in the relative prices of distillates and gasoline.

With winter approaching, distillates, would normally command a premium of around 36 cents per gallon, $15 per barrel, over gasoline, and the premium would normally rise through year-end and into January.

However, this year the premium has been falling and shrunk to just a third of its normal level, around 12 cents per gallon.

REFINERIES RETURN
U.S. refineries have passed the half-way point of the maintenance season. Crude processing has already increased by more than 350,000 bpd over the last three weeks.

Runs are likely to rise by a further 500,000 to 900,000 bpd over the course of November and December based on prior experience.

Increased processing should limit any further increase in crude oil stocks before the year-end while stabilising gasoline inventories. The main challenge for refiners will be marketing surplus propane and middle distillates.

U.S. propane exports have been increasing rapidly and competing in markets much further afield than was the case in the past, according to the EIA ("U.S. propane exports increasing, reaching more distant markets" Nov. 3).

Propane exports were initially directed towards neighbouring markets in Mexico, the Caribbean and South America but are now reaching Europe and Asia, where they compete with supplies from Saudi Arabia and the Middle East.

Marketing surplus distillate is more challenging because diesel demand in the United States and China has been sluggish, and big new refineries in the Middle East and Asia are geared to maximise diesel production.

However, fears that storage space for diesel will run out and force refinery slowdowns are overblown.

MARKETING DISTILLATE
As diesel becomes cheaper, more will be drawn into secondary stocks (held by wholesalers) and tertiary stocks (held by end users) outside the statistical system.

Most distillates are consumed as diesel in trucks, cars, trains and marine bunkers, where the opportunities for boosting demand in the short term are relatively limited but not zero.

Distillates are also used for heating and power generation as a primary generator fuel, as dual-fuel with natural gas, and as lighting-up fuel in coal-fired power stations.

And distillates are used as marine bunkers where they are burned in combination with or instead of heavy fuel oil.

If distillate remains in oversupply and gets cheaper, more of it will be pushed into these non-highway uses, where it will compete with natural gas, residual fuel oil and coal.

By John Kemp