Midwest distillate inventories rise due to increased refining activity and logistics constraints

Higher regional refinery runs and constraints on moving product outside the region have contributed to rapid increases in Midwest (PADD 2) distillate inventories (Figure 1). From June 9 to July 14, regional inventories of distillate fuel oil, usually consumed as diesel, increased by 4.7 million barrels (18%). The changes in regional distillate inventories are contributing to increased volatility in Midwest distillate prices and crack spreads. Before the recent rise, Midwest regional inventories had been trending at or below the five-year (2018–2022) low since April 2023, but as of July 21, they are now well above the five-year low and remain around 1.3 million barrels below the five-year average.

Midwest distillate inventories for the week of July 14 were the highest recorded for the region since February of last year. Midwest distillate inventories often build rapidly in the summer, although that didn’t occur last year. In 2022, low inventories in the Midwest persisted through the summer and into the harvest season, when distillate stocks typically draw an average of about 8 million barrels from September through November, depending on the intensity of agricultural sector demand. Since the start of 2023, Midwest distillate inventories have generally remained low, and a busier-than-average refinery maintenance season contributed to above-average draws in April and May.

Crude oil inputs to refineries in the Midwest have climbed to their highest levels this year, increasing utilization and driving of the increase in distillate stocks (Figure 2). The recent increase in Midwest production partially reflects refinery capacity coming back online following the intensive maintenance season. It also captures the return to full functionality of the 150,000-barrel-per-day (b/d) Cenovus Toledo refinery (formerly the bp-Husky Toledo refinery). Cenovus also restarted the 40,000-b/d Superior refinery in Wisconsin beginning in April 2023.

A fire at the bp-Husky Toledo refinery last September resulted in a long-term outage that reduced Midwest regional refinery runs and production of motor gasoline, distillate, and other petroleum products. The outage persisted through the first quarter of 2023 until the refinery resumed operations in June. During that time, bp sold its stake in the facility to Cenovus (Husky’s parent company since 2021), and the two companies entered into a supply agreement to meet the refinery’s crude oil needs. The end of the region’s extended maintenance cycle, combined with the return of the Toledo refinery, increased refinery crude oil inputs above the five-year high in mid-July, according to our Weekly Petroleum Status Report.

More refinery processing increased production of refined products such as gasoline and diesel. The Midwest has historically moved volumes of refined products to the East Coast for consumption and to the Gulf Coast for export. Movements of refined products from the Midwest historically flow by a combination of pipeline, rail, and river barge shipments. Total shipments of distillate from the Midwest to neighboring PADDs on the East Coast, Gulf Coast, and Rocky Mountains averaged 89,000 b/d in 2022, and gasoline shipments averaged 157,000 b/d. The largest share of petroleum product shipments out of the Midwest is hydrocarbon gas liquids (HGLs), which account for 86% of all petroleum product shipments to other PADDs.

As of June 1 and scheduled through this September, the locks along the Illinois River connecting Lake Michigan to the Mississippi River are undergoing maintenance. Several of the locks and dams are scheduled to be closed for an estimated 120 days. As increasing refinery runs in the Midwest contribute to higher gasoline and diesel production, the lock maintenance limits the ability to move products out of the Chicago region by barge to other markets. The regional infrastructure constraint has increased inventories of diesel (in particular) and gasoline in the Midwest. The rapid increase in diesel inventories has led to regional diesel price volatility compared with diesel prices in other trading hubs. Crack spreads for distillate fuel oil—a measure of the value of refining distillate by subtracting its spot market price from the price of a corresponding volume of crude oil—began declining in Chicago relative to other regional benchmarks as inventories increased (Figure 3). July monthly distillate crack spreads in Chicago averaged $0.57 per gallon (gal), down $0.10/gal from June and just under the five-year average for July ($0.58). The Chicago crack spread for July was also less than the monthly average distillate crack spread at the U.S. Gulf Coast of $0.72/gal, which remains $0.23/gal higher than the five-year average for that market. Although Midwest distillate prices are likely to face downward pressure because ongoing lock maintenance is expected to continue through September, they also underwent brief, sharp increases near the end of July. The increases are most likely the result of a combination of end-of-month trading activity, and rising distillate prices at the U.S. Gulf Coast, reflecting the impact of high prices there.

The outlook for distillate inventories is beginning to look tighter in the second half of summer and the increased regional inventories in the Midwest contrast with low overall U.S. inventories. The ongoing Illinois River lock maintenance is likely to complicate and constrain inter-PADD transfers through September, at which point we would also expect significant distillate inventory draws in response to the harvest season and potentially increasing price stability compared with the current disruption, as the market returns to more normal conditions for that time of year.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.