November 5, 2015

High distillate fuel oil inventories in Central Atlantic weighing on distillate spot price

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Stocks of distillate fuel oil in the Central Atlantic, which encompasses the New York Harbor region, have risen nearly every week since April, reaching 36.9 million barrels as of October 30. This level is 9 million barrels above the five-year average and 14.6 million barrels above the same time last year. The relatively high levels of distillate inventories are depressing distillate prices in the New York Harbor spot market.

Over the past few years, the need for distillate inventories in the Central Atlantic Region (Petroleum Administration for Defense District or PADD 1B) has decreased because of the gradual decline in the demand for heating oil, the aggregation of high, low, and ultra-low sulfur specifications into just high and ultra-low sulfur distillate, and the ability to import distillate when necessary. This year, however, high gasoline crack spreads in domestic and international markets during the summer resulted in inputs to U.S. refineries reaching record highs, which in turn boosted distillate production, which would either need to be consumed or stored. Growing distillate inventory levels in PADD 1B, particularly for this time of year, may also indicate a lack of demand for distillate regionally before the traditional heating season begins. Several regions in the United States, including the New York and Philadelphia regions, have experienced declining manufacturing activity, possibly affecting distillate demand.

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Because of the rise in distillate inventories in PADD 1B, the ultra-low sulfur diesel (ULSD) spot price in New York Harbor moved lower compared with the ULSD front month futures contract price in recent months. ULSD is a specific type of distillate that is used as home heating oil and as a transportation fuel. The spot price for ULSD is the purchase or sales price for delivery within the next week, while the ULSD front month futures price represents the price for delivery in the next calendar month. In October, the average spread between the ULSD New York Harbor spot price and the ULSD front month futures price was negative three cents per gallon, the largest discount since the futures contracts began using ULSD as the underlying commodity in April 2013. It is also the largest discount since August 2010, when the data represented higher-sulfur diesel prior to the switch to ULSD.

For much of the time since April 2013, the spread was near zero, reflecting little difference in the spot and front month futures prices for ULSD. Two exceptions arose, however, during the 2014 and 2015 winter seasons, when ULSD spot prices in New York Harbor rose sharply in response to the substantial distillate inventory drawdowns during the colder-than-normal winters. More recently, distillate supply has significantly exceeded demand in the Northeast, which has resulted in falling prices for ULSD available for purchase on the spot market.

Global distillate market factors can also affect New York Harbor ULSD spot prices because of PADD 1's reliance on distillate imports to meet demand, particularly during the U.S. winter season. In recent years, two refineries in Saudi Arabia were constructed that maximize distillate output, and the expanded Ruwais refinery in the United Arab Emirates began to export distillate in 2015. This year, however, because of weaker global economic growth and increased refinery runs, the global market became well supplied with distillate. Trade press reports indicate distillate inventories in Europe and Asia this year have reached the highest level in several years, depressing global distillate prices.

Principal contributor: Rebecca George