US distillate stocks fail to make summer recovery amid refinery outages
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[July 25, 2023] By
Laura Sanicola
(Reuters) - U.S. diesel, heating oil and jet fuel stockpiles have failed
to recover from the 10-year lows hit last year when high prices caused
the Biden administration to consider a ban on fuel exports, leaving the
markets vulnerable to supply shocks when demand picks up toward the end
of the summer.
Though diesel prices have fallen by 30% year-on-year, tight supplies
could spell trouble if the U.S. and global economy strengthens going
into the final quarter of the year.
A leading economic indicator forecasts that the U.S. economy is likely
to be in recession from this third quarter to the first quarter of 2024,
but economists including Goldman Sachs' Jan Hatzius and Janet Yellen
have downplayed recession risks in recent weeks as inflation cools.
Inventories of these fuels known as distillates are still near 10-year
lows, at just over 118 million barrels, according to the latest data
from the U.S. Energy Information Administration (EIA).
A slew of refinery problems has prevented distillate fuel inventories
from growing, as they typically do during the summer.
At Phillips 66's Bayway refinery in New Jersey, the 150,000
barrel-per-day catalytic cracking unit - the largest gasoline-making
unit in the Western Hemisphere - was offline most of June and July for
unplanned repairs.
Marathon Petroleum’s 75,000-bpd reformer at its Galveston Bay, Texas,
refinery has been offline since a May 15 fire that killed one worker.
The unit - also the Western Hemisphere's largest reformer - converts
refining byproducts into an octane-boosting product used in gasoline.
Overall, unplanned outages in June averaged about 550,000 bpd, nearly
double June 2022's unscheduled shutdown of near 290,000 bpd of capacity,
according to data from refining intelligence firm IIR Energy.
"This is not normal stuff," said a Houston-based refined products
trader.
Stocks have not risen even though demand for diesel fuel has been
significantly lower than a year ago due to weak trucking and industrial
activity.
"Low distillate inventories could be a problem if there's flooding or
hurricanes that affect refineries this summer," said Hillary Stevenson,
senior director of Energy Market Intelligence at IIR.
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General view of oil tanks and the Bayway
Refinery of Phillips 66 in Linden, New Jersey, U.S., March 30, 2020.
REUTERS/Mike Segar/File Photo
Seasonally adjusted industrial production has dropped about 10% from
late 2022, and U.S. containerized exports are near two-year lows,
according to data from the census bureau.
The four-week average for U.S. distillate demand is about 7% below
where it was a year ago, according to the EIA.
"Couple lower industrial production with container exports being
near the same levels as 2018, and that helps explain low domestic
inventories," said Jason Miller, associate professor of logistics at
Michigan State University.
The increased costs of carrying inventories due to higher interest
rates have also reduced refiner appetite to fill up the storage
tanks, and has encouraged traders to drain inventories where they
can, said Ernie Barsamian, founder and CEO of The Tank Tiger, a
terminal storage clearing house based in Princeton, New Jersey.
"Traders and refiners are kicking tires of storage to take advantage
of opportunities in the cash market, and because working capital
requirements too expensive," Barsamian said.
U.S. refiners are instead sending diesel to Europe, whose refiners
have been running at lower capacity and are also in need of supplies
to replace Russian fuel that is now sanctioned.
Exports, however, do not explain why inventories are so low. A flood
of Russian diesel exports to Latin America, typically a key export
market for the U.S. fuel, has in part caused U.S. distillate exports
to fall below 2022 levels since April, according to traders and EIA
data.
(Reporting by Laura Sanicola; Editing by Simon Webb and Marguerita
Choy)
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