New York | Reuters — U.S. diesel stockpiles did something this year that has never happened in the summer before: They shrank. And that was even before Hurricane Harvey landed, knocking out a quarter of U.S. refining capacity, crippling production of fuel products.
Thanks to surprising summer demand, particularly from exports, inventories of diesel, jet fuel and heating oil were heading into the busy winter at their lowest levels in three years.
Harvey’s effects cost refiners even more production of fuel, raising the possibility of shortages and higher prices if the U.S. suffers another major disruption or an unexpectedly frigid winter.
Since 2000, between June and September distillate inventories have risen by an average of 10 per cent, but this year, they fell by 2.2 per cent, the first decline since 1982 when record-keeping began, a Reuters analysis of U.S. Energy Information Administration data shows.
The summer is typically when refiners build stocks of distillates to meet growing fall and winter demand for heating oil and crop harvesting.
“If we get another hurricane or similar event, things could get real tight,” said Robert Campbell, head of oil products markets at London-based Energy Aspects.
Inventories typically remain flat or rise modestly through September, and while some refiners delayed scheduled work, the loss of the Gulf has hit overall U.S. refining. As a result of Harvey, distillate stocks fell another 4.6 million barrels in the first two weeks of September, EIA data show.
U.S. distillate stocks are now at three-year lows for this time of year, and 5.2 per cent below their historical average.
The last two winters have been among the warmest ever recorded, but forecasters this year are predicting a colder, more typical season, according to Reuters data.
Profit margins have jumped to five-year highs as a result, which should incentivize U.S. refiners to run plants at full tilt and thwart any supply concerns, but an unexpected event could change things.
Several refineries are still in the midst of restarting plants in the U.S. Gulf, where 4.4 million barrels of capacity was taken down due to Harvey.
U.S. supply issues could test the resiliency of an export market that is expected to grow in upcoming months. The International Energy Agency said on Wednesday that global fuel stocks could soon fall below five-year averages “because of the impact of Hurricane Harvey.”
The unusual inventory drawdown was fueled in part by growing demand in Latin America, which could feel the sting of reduced availability of Gulf products.
Harvey’s impact is also being felt in Europe, a big export market for the U.S. European diesel stocks are expected to fall at the fastest rate in at least three years in September as U.S. imports slow, traders have told Reuters.
Gulf exports to Europe are expected to drop to about 500,000 tonnes in September, far lower than the 1.5 million to two million tonnes seen in previous months, according to traders and shipping data.
The inventory also sets the stage for a bullish run in the diesel market. The 3-2-1 crack spread, a measure of the profit refineries make from converting three barrels of oil into gasoline and diesel, is at $20.63 a barrel, the highest level seasonally since 2012, and more than $6 above the average during that time (all figures US$).
In addition, future-dated diesel contracts are trading at a lower rate than the current spot price, also known as backwardation, which incentivizes refiners to supply the market and not put product in storage to sell later. The reverse condition, contango, would motivate refiners to store product.
“Inventories are looking pretty healthy and without any contango there is not much in storage,” one trader said.
— Jarrett Renshaw reports on the energy sector for Reuters from New York.