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January 6, 2012

U.S. refineries and blenders produced record amounts of distillate fuels

graph of Finished motor gasoline and distillate fuel oil production, 2011, as described in the article text
Source: U.S. Energy Information Administration, Weekly Petroleum Status Report.
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U.S. refiners produced historically high volumes of distillate fuels (a category that includes both diesel fuel and heating oil) and motor gasoline in 2011. By fine-tuning their production mix, refineries consistently set record levels of distillate production, most recently topping 5 million barrels per day (bbl/d) for the weeks ending December 2 and December 16, 2011.

In 2011, weekly distillate production was above the five-year historical range 25 times, and ranked second highest an additional 19 times. Finished motor gasoline production was robust over the same period, but was slightly more in line with production volumes at comparable times of year since 2006.

Because of its chemical composition, crude oil run through a refinery typically yields roughly twice as much motor gasoline as distillate fuels. Therefore, regardless of economic or other incentives, refiners cannot completely stop making some finished petroleum products in favor of others. However, by adjusting downstream processes and the types of crude oil used, refineries can optimize production to fine-tune the balance of their finished products output. For much of 2011, refiners saw favorable margins and robust global demand for distillate fuels. In order to benefit from these trends, refineries:

  • Increased crude runs to maximize overall output. This explains why both motor gasoline and distillate fuels production levels are high relative to the five-year historical ranges.
  • Shifted production mix. This explains why the distillate fuels production levels exceeded historical ranges in more weeks than motor gasoline production did.

Since early October, the spot price for ultra-low-sulfur distillate fuel oil rose, while the spot price for motor gasoline (as measured by New York RBOB spot prices in the chart below) declined, widening the spread between these two petroleum product prices. On November 14, 2011, the spot price for ultra-low-sulfur distillate was nearly 65 cents per gallon higher than the spot price for RBOB. The spread between these product prices had not been more than 60 cents per gallon since November 2008.

graph of Gasoline and diesel spot prices, 2011, as described in the article text
Source: U.S. Energy Information Administration, based on Bloomberg.
Note: Ultra-low-sulfur distillate spot prices shown as New York ultra-low-sulfur distillate spot prices; motor gasoline prices reflect New York RBOB spot prices.

Along with high domestic prices, strong international markets for distillate fuel oils have spurred increased production. In the United States, refineries have typically optimized production for finished motor gasoline to meet high U.S. demand. European refineries, on the other hand, tend to produce higher percentages of distillate fuel oils, as diesel is used more broadly there for transportation. Due to crude supply disruptions to European refineries for much of this year, the region has imported more finished products. Weekly U.S. gross distillate export estimates (bound primarily for European and South American markets) were at record levels in the fourth quarter of 2011, topping more than 0.9 million bbl/d in October and November, and exceeding 1 million bbl/d in December.

Robust global distillate demand has led to a significant inventory draw, despite heightened U.S. production. From the end of September to the end of December, U.S. distillate inventories fell by more than 13 million barrels.