Distillate in Depth – The Supply, Demand, and Price Picture

U.S. Distillate Market Leading Up to Winter

•In 2004, excess gasoline supply developed, while the distillate market tightened

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•The two products returned to similar balances by mid Summer 2005

–High distillate prices in 2005 provided incentive to increase distillate yields to winter levels, and resulting increased production caused inventories to build

–High availability of gasoline imports kept gasoline inventories high, despite strong demand and high distillate yield

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•But the Hurricanes Katrina and Rita have caused major gasoline and distillate supply problems


	SIn 2004, we saw the gasoline and distillate market balances diverge, with distillate tightening while gasoline inventories moved from low to high levels.

	SGasoline imports remained strong in 2005. On the other hand, the distillate price premium over gasoline caused refiners to increase distillate yield and move toward a better product balance. Distillate stocks were at a comfortable level at the end of August, looking like we were on the way to being well set for the winter fuel season.

	SThen hurricanes Katrina and Rita have caused an unprecented level of refinery outages. We are now seeing distillate stock fall as we speak -- 5millon barrel decline in distillate stocks last week, possibly another 4 million this week, another 3 million barrels next week and the situation is transformed from a comfortable to an uncomfortable situation.