Release date: October 15, 2020 | Next release date: October 21, 2020
EIA expects current, record-high U.S. distillate inventories to fall gradually through the winter heating season
U.S. distillate fuel oil inventories remained high through summer 2020 as a result of production outpacing demand, which continues to be affected by responses to the 2019 novel coronavirus disease (COVID-19). Although about two-thirds of distillate in the United States is consumed for on-highway use each year, demand typically increases during the fall harvest (October–November) in the agriculture sector and during the winter heating season (October–March) in the residential sector. The U.S. Energy Information Administration (EIA) expects that increased demand in these sectors will help to draw down high U.S. distillate inventories, but inventories are still likely to remain higher than the five-year (2015–19) average throughout most of the upcoming winter season. EIA forecasts that high inventories and lower crude oil prices will continue putting downward pressure on diesel prices through the 2020–21 winter season.
In March, U.S. refiners reduced runs as the effects of COVID-19 decreased demand for transportation fuels. Demand fell faster than supply, leading to large and rapid increases in product inventories. However, gasoline inventories began drawing down in late April, and in mid-May, refiners began to increase throughput to meet recovering gasoline demand. Refiners also shifted yields away from jet fuel and toward diesel during a period of historically low air travel. The increased refinery runs, yield shifts, and low demand contributed to rising inventories of distillate. U.S. distillate inventories peaked during the week ending July 31 at 180.0 million barrels, the largest weekly inventory recorded since December 1982. Distillate inventories have since drawn down, falling to 171.8 million barrels as of October 2, but are still 30.9 million barrels higher than the five-year average for the same period (Figure 1).
Most U.S. distillate inventories are located in the East Coast (Petroleum Administration for Defense District, or PADD, 1) and Gulf Coast (PADD 3) regions. The East Coast has the largest population and is the largest source of petroleum product demand in the United States. However, the region’s relatively low refining capacity means it relies on pipeline transfers from the Gulf Coast to meet regional demand. These two regions account for the largest share of inventory capacity in the United States, and they currently account for the vast majority of the current oversupply.
After trending much higher than the five-year range for most of summer 2020 (May–August), East Coast distillate inventories are now slightly lower than their five-year high. East Coast distillate inventories have declined 5.8% from the summer’s high of 66.8 million barrels during the week ending July 3, down to 62.9 million barrels as of the week ending October 2. In the Gulf Coast, distillate inventories are higher relative to the five-year average, totaling 60.0 million barrels as of the week ending October 2, or 16.9 million barrels (39.3%) more than the previous five-year high of 43.1 million barrels for the same period (Figure 2). The higher inventories are the result of low diesel demand since April, continued refinery production from Gulf Coast refiners to meet gasoline demand, and fewer exports to Europe and Latin America.
Inventories in other regions of the country were also above the five-year average after April. However, by September, distillate inventories in the Midwest (PADD 2) and the West Coast (PADD 5) returned to levels near their five-year averages. Rocky Mountain (PADD 4) inventories remain higher than the five-year range, but the region accounts for a relatively small share of total U.S. inventories at 2.4% of U.S. inventories as of the first week of October.
U.S. demand of distillate fuel oil, which EIA measures using a proxy of product supplied, fell from 3.9 million barrels per day (b/d) in March 2020 to 3.5 million b/d in April, according to EIA’s Petroleum Supply Monthly. Weekly data indicate that there was less U.S. demand for distillate fuel oil than average through the summer. The lower demand for distillate is driven by the economic impact the COVID-19 outbreak had on industrial and on-road diesel demand, which, along with gasoline and jet fuel, experienced substantially reduced demand in April. Demand for distillate, measured as product supplied, began increasing again in June but the rolling four-week average remained lower than the five-year range until September 2020 (Figure 3).
Distillate demand typically increases during the fall harvest season in the agriculture sector. According to its latest forecast, the U.S. Department of Agriculture (USDA) expects the 2020 harvest season to be more productive than average. It forecasts that corn yield per acre will increase by 6.1%, and the area harvested will increase by 1.0% compared with 2019. The USDA expects soybean yield per acre to increase 8.7% from 2019, and total area harvested to increase 10.0% from 2019. The relative increase in overall area harvested and overall yield will likely increase diesel demand during the harvest season.
Distillate demand in the United States typically remains elevated through the winter months, when many homes in New England and the Mid-Atlantic use the fuel for space heating. EIA expects the 2020–21 winter season to be colder than the previous winter of 2019–20, which was relatively mild. Using heating degree days as a measure of how cold it will be during the winter of 2020–21, the National Oceanic and Atmospheric Administration (NOAA) expects northeastern states to largely follow the national trend, with winter in the northeastern states just slightly colder than the 10-year average. EIA expects that the harvest and heating seasonally-driven demand increases will continue to contribute to inventory draws into early 2021.
The decrease in U.S. distillate demand and increase in distillate inventories resulted in lower wholesale distillate prices in April and lower distillate crack spreads (the difference in price between a barrel of distillate fuel oil and a barrel of crude oil) in May. The relatively low distillate crack spreads and high inventories, combined with seasonally less demand for gasoline in the winter, will likely put pressure on refining margins. U.S. refiners and blenders were producing an estimated 4.5 million b/d of distillate during the first week of October, about 0.4 million b/d (8%) less than the five-year average for that period. Refinery yields of distillate averaged about 2% more than the five-year average during the same week.
High U.S. distillate inventories and relatively lower seasonal gasoline demand after Labor Day put pressure on refiners to reduce distillate production by reducing refinery inputs, which remain relatively low despite an increase from April’s levels. Refiner gross inputs in the first week of October were down 1.9 million b/d from the five-year average, and they have been down between 1.9 million b/d and 3.5 million b/d since July 2020. Although refinery runs have slowed because of decreased demand for petroleum products, current refinery operations are also lower because companies have already begun maintenance and turnarounds that usually take place during the fall. Recent hurricanes and tropical storms have also contributed to reduced operations in several refineries along the U.S. Gulf Coast this year. As lower production and higher demand help to clear inventories, EIA forecasts in its October Short-Term Energy Outlook (STEO) that distillate crack spreads will gradually recover through the winter before ultimately returning to near-2019 levels in summer 2021. The spring maintenance season will continue reducing distillate inventories to levels closer to the five-year average.
EIA expects distillate prices to remain lower than their pre-COVID outbreak levels because of overall lower crude oil prices. Although EIA expects distillate demand in the home heating sector to be higher this winter compared with 2019–20, the lower distillate prices will cause lower overall expenditures. In the October STEO, EIA forecasts that expenditures during the 2020–21 winter will be 3% lower than average for customers that use distillate fuel oil for space heating. Despite the expected increase in HDDs for the upcoming winter, EIA forecasts that home heating expenditures for households that rely on distillate fuel oil will be 10% lower than during the 2019-20 winter season.
U.S. average regular gasoline price decreases, diesel price increases
The U.S. average regular gasoline retail price decreased nearly 1 cent, remaining virtually unchanged at $2.17 per gallon on October 12, 46 cents lower than the same time last year. The Midwest price decreased less nearly 2 cents to $2.03 per gallon, the Rocky Mountain price decreased 1 cent to $2.26 per gallon, and the West Coast price decreased nearly 1 cent to $2.80 per gallon. The Gulf Coast price increased more than 1 cent to $1.84 per gallon, and the East Coast price increased less than 1 cent, remaining virtually unchanged at $2.13 per gallon.
The U.S. average diesel fuel price increased nearly 1 cent to $2.40 per gallon on October 12, 66 cents lower than a year ago. The Midwest price increased nearly 2 cents to $2.28 per gallon, the Rocky Mountain price increased more than 1 cent to $2.33 per gallon, the West Coast price increased nearly 1 cent, remaining virtually unchanged at $2.93 per gallon, and the Gulf Coast price increased nearly 1 cent to $2.15 per gallon. The East Coast price was unchanged at $2.47 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.9 million barrels last week to 99.9 million barrels as of October 9, 2020, 10.1 million barrels (11.2%) greater than the five-year (2015-19) average inventory levels for this same time of year. Midwest and East Coast inventories decreased by 1.3 million barrels and 1.1 million barrels, respectively. Rocky Mountain/West Coast and Gulf Coast inventories increased by 0.4 million barrels and 0.2 million barrels, respectively.
Residential heating fuel prices increase
As of October 12, 2020, residential heating oil prices averaged $2.14 per gallon, more than 1 cent per gallon above last week’s price but more than 81 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged nearly $1.29 per gallon, more than 9 cents per gallon above last week’s price but more than 77 cents per gallon lower than a year ago.
Residential propane prices averaged more than $1.77 per gallon, less than 1 cent per gallon above last week’s price but more than 7 cents per gallon below last year’s price. Wholesale propane prices averaged $0.70 per gallon, more than 5 cents per gallon higher than last week’s price and almost 10 cents per gallon above last year’s price.
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Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 10/12/20 | Week | Year | |
| Gasoline | 2.167 | -0.005 | -0.462 |
| Diesel | 2.395 | 0.008 | -0.656 |
| Heating Oil | 2.141 | 0.012 | -0.814 |
| Propane | 1.774 | 0.002 | -0.073 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 10/09/20 | Week | Year | |
| Crude oil | 40.60 | 3.55 | -14.10 |
| Gasoline | 1.203 | 0.079 | -0.436 |
| Heating oil | 1.193 | 0.108 | -0.765 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 10/09/20 | Week | Year | |
| Crude oil | 489.1 | -3.8 | 54.3 |
| Gasoline | 225.1 | -1.6 | -1.1 |
| Distillate | 164.6 | -7.2 | 41.1 |
| Propane | 99.897 | -1.946 | 4.103 |