Release date: August 22, 2018 | Next release date: August 29, 2018
U.S. distillate demand highest since 2007
U.S. demand for distillate fuel oil is at its highest level in more than a decade. During the first five months of 2018, U.S. distillate fuel oil product supplied (the volume delivered out of the primary supply chain, which is a proxy for demand) averaged 4.2 million barrels per day (b/d), an increase of more than 270,000 b/d from the 2017 level and the highest level since 2007 (Figure 1). This strong U.S. demand is supporting distillate prices, crack spreads, and production. At the same time, U.S. distillate exports are down from record-high levels set in 2017. Despite record refinery runs and lower exports, distillate inventories in the United States have declined because consumption has outpaced the rate at which inventories have been replenished.
In 2018, the January–May average retail diesel fuel price was 51 cents per gallon (gal) higher than the price during the same period in 2017. The price of Brent crude oil also increased during this period, averaging 41 cents/gal higher compared with the level in 2017. The increase in the price of Brent is partly responsible for the diesel price increase. However, the diesel price increased more than the Brent price, resulting in an expanding diesel crack spread (the difference between the cost of crude oil and the price of diesel).
The diesel crack spread on the U.S. Gulf Coast increased from 19 cents/gal during the first five months of 2016 to 37 cents/gal during the first five months of 2018, providing incentives for higher levels of distillate production. Similar trends were seen in other key global refining and distribution hubs (Figure 2), including the Amsterdam-Rotterdam-Antwerp region (reflecting demand in Northern Europe) and Singapore (one of Asia’s major refining centers and trading hubs).
Although gasoline crack spreads tend to exhibit high seasonality, the January–May average on the U.S. Gulf Coast has remained between 23 cents/gal and 27 cents/gal for the past three years. During the same months in 2016, diesel crack spreads on the U.S. Gulf Coast averaged four cents lower than gasoline crack spreads, but they increased during the next two years. In 2017, the average diesel crack spread was more than 1 cent higher than the gasoline crack spread, and in 2018, the difference increased to nearly 11 cents. The strengthening diesel crack spreads likely reflect strong U.S. and global demand for distillate.
Higher crack spreads provide incentives for refiners to produce distillate. The January–May average net production of distillate fuel oil in the United States set a record high in 2018 at 4.96 million b/d, which was 49,000 b/d higher than net production during the same months in 2017. Strong refinery yields of distillate fuel oil also reflect the higher production levels. Using the 12-month moving average to smooth out the seasonality in refinery yields, May distillate yields were at the highest level since 2015. Export and inventory data indicate that the increased production is being consumed domestically.
Although U.S. distillate exports remain elevated compared with historical data, exports through the first five months of this year are down compared with 2017 levels. Monthly U.S. distillate exports reached a record high in July 2017, and annual exports also set a record high during that year. Exports of distillate for the first five months of 2018 averaged 1.2 million b/d—60,000 b/d lower than 2017 levels but still the second-highest level on record—which could indicate somewhat robust distillate demand outside of the United States. With high U.S. production and a slight decrease in exports this year, more distillate is available for the U.S. market compared with 2017, but distillate inventories have fallen.
As of May 2018 (the latest month for which data are available), U.S. distillate inventories were 115.2 million barrels, the lowest level for the month of May since 2008 and 22.4 million barrels lower than the five-year (2013–17) average (Figure 3). During the first five months in 2018, distillate inventories have been lower than the five-year average in every month except February. The low inventory levels reflect U.S. consumption increases that have not been fully offset by increased production or lower net exports.
The growth in U.S. distillate consumption is largely attributable to increased trucking activity, which is the largest domestic use for distillate fuel. According to data provided by the American Trucking Association, the 12-month rolling average from June 2017 to May 2018 increased by 6.71%, the highest 12-month average increase since May 1999 (Figure 4). Demand for trucking services tends to be closely correlated with economic growth and industrial activity, both of which have been higher in the first five months of 2018 compared with the same period in 2017.
Industry is also a direct consumer of distillate fuel. The U.S. Energy Information Administration (EIA) creates several industrial indices weighted by specific fuel types to indicate how industrial activity may be affecting demand for those fuels. The distillate-weighted industrial production averaged 111.1 for the first five months of 2018, the highest five-month average since July 2008.
During the winter season, distillate is also used as a heating fuel, primarily in the Northeast. The 2017–18 winter season (EIA defines the winter heating fuel season as October through March), which was markedly colder than the 2016–17 winter season, had 872 heating degree days (the measure of how cold a location is over a period of time relative to a base temperature) compared with 850 heating degree days in the 2016–17 winter. As a result, winter-season demand for distillate in the East Coast (Petroleum Administration for Defense District 1) reached the highest levels since 2014–15.
In contrast to the January 2018 through May 2018 data, estimated weekly data for the past three weeks (from the week ending July 27 through the week ending August 10) indicate a trend of stronger-than-normal distillate stock builds for this time of year. During these weeks, distillate product supplied fell by 338,000 b/d from the January–May average, and refiner and blender net production increased by 288,000 b/d. Distillate exports also fell slightly from its January–May level, increasing available domestic distillate supplies. Despite three consecutive weekly stock builds, distillate inventories as of August 10 were more than 19 million barrels lower than last year’s levels at this time and more than 11 million barrels lower than the five-year average. It remains unclear whether these stronger-than-normal stock builds reflect an early onset of seasonal distillate builds in preparation for winter or whether they represent a shift toward slower demand growth.
U.S. average regular gasoline and diesel prices decrease
The U.S. average regular gasoline retail price decreased 2 cents from last week to $2.82 per gallon on August 20, 2018, up 46 cents from the same time last year. East Coast prices fell nearly three cents to $2.78 per gallon, West Coast prices decreased over two cents to $3.31 per gallon, and Midwest and Gulf Coast prices each fell nearly two cents to $2.73 per gallon and $2.57 per gallon, respectively. Rocky Mountain prices increased nearly two cents to $2.96 per gallon.
The U.S. average diesel fuel price decreased 1 cent from last week to $3.21 per gallon on August 20, 2018, 61 cents higher than a year ago. East Coast prices fell over one cent to $3.21 per gallon, Midwest prices decreased one cent to $3.13 per gallon, Rocky Mountain and Gulf Coast prices each fell nearly one cent to $3.35 per gallon and $2.98 per gallon, respectively, and West Coast prices decreased less than one cent, remaining virtually unchanged at $3.71 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 0.9 million barrels last week to 68.8 million barrels as of August 17, 2018, 10.1 million barrels (12.8%) lower than the five-year (2013-2017) average inventory level for this same time of year. Gulf Coast and Rocky Mountain/West Coast inventories decreased by 1.7 million barrels and 0.1 million barrels, respectively, while Midwest and East Coast inventories increased by 0.7 million barrels and 0.2 million barrels, respectively. Propylene non-fuel-use inventories represented 4.5% of total propane/propylene inventories.
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Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 08/20/18 | Week | Year | |
| Gasoline | 2.821 | -0.022 | 0.461 |
| Diesel | 3.207 | -0.010 | 0.611 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 08/17/18 | Week | Year | |
| Crude oil | 65.91 | -1.72 | 17.40 |
| Gasoline | 1.981 | -0.058 | 0.357 |
| Heating oil | 2.098 | -0.042 | 0.478 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 08/17/18 | Week | Year | |
| Crude oil | 408.4 | -5.8 | -54.8 |
| Gasoline | 234.3 | 1.2 | 4.4 |
| Distillate | 130.8 | 1.8 | -17.6 |
| Propane | 68.841 | -0.941 | -3.332 |