Released on August 9, 2006
(Next Release on August 16, 2006)

A Year of Significant Supply Challenges
BP’s recent announcement of the partial shutdown of Alaska’s Prudhoe Bay production, due to pipeline corrosion concerns, is one more supply issue in a growing list this year. While most of us have been focusing on instabilities in areas such as the Middle East and Africa that might affect crude oil supplies, this event popped up in our own backyard. The extent of the disruption is still not known, but inventory levels provide some time for refiners to re-allocate supply, and most West Coast refinery configurations are complex enough to handle various crude qualities, so substitutes for Alaskan crude oil are available. EIA presents some related insights in its Short-Term Energy Outlook, and will provide more information on this topic within the next few days.

In addition to events affecting crude oil markets, the U.S. refining industry has had its share of challenges this year. Refinery utilization has been lower than typical this year, due to hurricane damage experienced last fall and to high maintenance activities. In addition to normal maintenance, some refineries had to catch up on maintenance postponed last fall as a result of the hurricanes, and others had ultra-low-sulfur diesel fuel projects to complete. In July, several unplanned outages also affected utilization, bringing the month’s average to about 92%, compared to the historical July average of about 95%.

Last, but not least, refiners are dealing with two major fuel specification changes this summer. The petroleum industry decided to eliminate the use of methyl tertiary butyl ether (MTBE) in gasoline, and is using ethanol in its place. Ethanol production and imports have been increasing, and changes in gasoline production, distribution, and storage have been made to accommodate this shift. (See Eliminating MTBE in Gasoline in 2006.)

The second major transition is the move to ultra-low-sulfur diesel fuel (ULSD) for highway use. In June, refiners and importers of highway diesel fuel were required to begin providing at least 80% of their highway diesel fuel with no more than 15 parts per million (ppm) of sulfur, compared to previous highway diesel at 500 ppm. Terminals must be ready by September 1 with the new fuel, and retail facilities must be ready by October 15. (For further background on this program, see the Clean Diesel Fuel Alliance website.)

Total ULSD production progress has been good, as shown in the figure below, and ULSD is being produced in all PADDs. The main challenge is distributing the product. ULSD moves through the same pipelines and tanks as other petroleum products, including those with very high sulfur content, such as jet fuel, which can have as much as 3000 ppm sulfur. In many cases, ULSD is leaving the refineries at 7 or 8 ppm in order to allow for some sulfur increase as it travels through the system. But it takes very little sulfur left in a manifold or other equipment to push this product off specification.

Some terminal tanks are being switched from 500 ppm to 15 ppm diesel fuel now, as evidenced by rising 15 ppm inventories and falling 15-500 ppm stocks. As with other fuel specification transitions, tank drawdowns can result in short outage periods in local areas as a gap occurs between drawdown and the arrival of the first batch of ULSD. This, along with unplanned refinery outages and high seasonal diesel demand in the Midwest for crop harvesting, has added price pressure to diesel fuel in recent weeks.

The tremendous supply challenges faced so far this year have not resulted in major supply shortages. But as the Prudhoe Bay production loss reminds us, the challenges are not over. We will all be following the ULSD transition, which hopefully will continue without any major issues, and hurricane season this year should be less severe than last with its record 15 hurricanes. The National Oceanic and Atmospheric Administration just reduced their projections of the intensity of the hurricane season this year, but still expect 7 to 9 hurricanes, compared to the seasonal average of 6.

U.S. Average Retail Gasoline Price Gains 3.4 Cents
The U.S. average retail price for regular gasoline added 3.4 cents last week to reach 303.8 cents per gallon as of August 7, which is 67.0 cents higher than last year. Prices rose for the sixth week in a row, hitting above the $3 mark for the third week in a row. This was the second highest nominal weekly price on record. East Coast prices rose 2.0 cents to 303.3 cents per gallon, while the Rocky Mountains added 5.7 cents to 299.6 cents per gallon. The Midwest saw the largest regional price increase, gaining 6.8 cents to 305.4 cents per gallon. West Coast prices remained the highest in the nation, falling 0.3 cent to 311.8 cents per gallon. California prices were down 0.6 cent to 319.2 cents per gallon.

Retail diesel fuel prices gained 7.5 cents to reach 305.5 cents per gallon as of August 7, 64.8 cents higher than last year and the highest price since October 24. Prices were up throughout the country, with the Rocky Mountains seeing the largest increase of 15.6 cents to 320.8 cents per gallon, now the highest regional price in the country. West Coast prices added 4.7 cents to reach 311.3 cents per gallon while California prices were up 3.7 cents to 313.0 cents per gallon.

Propane Inventories Higher
Propane inventories moved higher last week with a 1.3-million-barrel stock build that positioned the nation’s primary inventories of propane at an estimated 59.5 million barrels as of August 4, 2006. East Coast inventories posted a weekly gain of 0.3 million barrels, while Midwest inventories moved up by 0.9 million barrels during this same time. The Gulf Coast region dropped by 0.2 million barrels last week, while the combined Rocky Mountain/West Coast regions rose by 0.3 million barrels during this same time. Propylene non-fuel use inventories fell by 0.7 million barrels and accounted for 5.8 percent of total propane/propylene inventories, compared with the prior week’s 7.0 percent share.

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