Global Diesel Demand on the Ropes?

  1. Slowing global economy eats in to distillate fuel oil demand.
  2. Low prices boost gasoline consumption.
  3. U.S. crude oil production breaks under nine million barrels daily.
  4. Natural gas demand growth being met with enhance production efficiency.

Al pic 2009_cropped

Sincerely,
Alan Levine Chairman, Powerhouse

 

 

 

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Table covers crude oil and principal products.  Other products, including residual fuel oil and “other oils” are not shown, and changes in the stocks of these products are reflected in “Total Petroleum Products.”Statistics Source: Energy Information Administration “Weekly Petroleum Status Report” available at www.eia.doe.gov

 

 

The Matrix

Analysts were writing the epitaph for gasoline demand growth not too many years ago. As recently as May, 2013, the Energy Information Administration attributed declining consumption to “an expansion of alternative fuel markets across all transportation modes, including light-duty vehicles such as passenger cars, heavy-duty vehicles such as freight-hauling trucks, and rail, marine, and air transportation.”

Refiners worked to make the shift away from gasoline and boost diesel output. Overseas, Saudi Arabia built refineries that could produce up to sixty per cent distillates. European refiners grew distillate capacities as well. Ironically, this came at a time when distillate demand activities like oil production, construction, and railroading began to slow. Moreover, below normal heating degree days this winter cut into demand as well.

Resurgence of gasoline demand raises concerns for distillate supply and price. Strong gasoline refinery production necessarily means production of co-product distillate. Refiners have only a little room to change the distillate share of refinery output. Crude slates can be altered or units like hydrocrackers can be shut, but this can affect only a small amount of distillate fuel oil.

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The most recent supply data for the United States shows distillate fuel oil storage now at 164 million barrels. This is more than forty days of supply, a large number in any case but even more so as winter is left behind.

Despite near term strength, HO prices tend to top out in April, moving, then, lower into summer. This could presage a longer period of depressed pricing for distillates. One press report noted, “the last time diesel stocks were high at the end of 2009, we entered a period when diesel demand grew more than gasoline, and yet it still took years to run through those excess diesel inventories,”

Production of crude oil in the United States has slipped below nine million barrels daily for the first time since October, 2014. The International Energy Agency now projects the world crude oil surplus to fall to only 200,000 barrels daily in the second half of 2016. This reflects falling U.S. production and a slower-than-anticipated recovery in Iranian exports.

Supply/Demand Balances

Supply/demand data in the United States for the week ending April 8, 2016 were released by the Energy Information Administration.

Total commercial stocks of petroleum increased 6.9 million net barrels during the week ending April 8, 2016.

Builds were reported in stocks of fuel ethanol, K-jet fuel, distillates, propane, and other oils. A draw was reported in stocks of residual fuel oil.

Crude oil supplies in the United States increased to 536.5 million barrels, a build of 6.6 million barrels.

Crude oil supplies increased in three of the five PAD Districts. PAD District 3 (Gulf Coast) crude oil stocks increased 7 million barrels, PADD 4 (Rockies) stocks grew 0.7 million barrels, and PADD 5 (West Coast) crude stocks added 0.9 million barrels. A draw was reported in stocks of crude oil in PAD District 2 (Midwest) of 1.9 million barrels. PADD 1 (East Coast) crude oil stocks were unchanged from the previous report week.

Cushing, Oklahoma inventories decreased 1.7 million barrels to 64.6 million barrels.

Domestic crude oil production decreased 31,000 barrels daily to 8.977 million barrels per day. This is the first daily crude oil production level below 9 million barrels since the last week of October, 2014, government data show.

Crude oil imports averaged 7.940 million barrels per day, a daily increase of 686,000 barrels.

Refineries used 89.2 per cent of capacity, a decrease of 2.2 percentage point from the previous report week.

Crude oil inputs to refineries decreased 492,000 barrels daily; there were 15.941 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, decreased 408,000 barrels to 16.207 million barrels daily.

Total petroleum product inventories saw an increase of 0.3 million barrels from the previous report week.

Gasoline stocks decreased 4.2 million barrels; total stocks are 239.8 million barrels. This build in gasoline stocks snaps a six week streak of draws. Demand for gasoline increased 409,000 barrels per day to 9.633 million barrels daily.

Total product demand increased 119,000 barrels daily to 19.987 million barrels per day.

Distillate fuel oil supply increased 0.5 million barrels; total stocks are 163.5 million barrels.  National distillate demand was reported at 3.853 million barrels per day during the report week. This was a weekly increase of 244,000 barrels daily.

Propane stocks increased 2.8 million barrels to 67.7 million barrels. Current demand is estimated at 700,000 barrels per day, a decrease of 138,000 barrels daily from the previous report week.

 

Natural Gas

According to the EIA:

Working gas stocks post net withdrawals during the first week of the 2016 refill season. Net withdrawals from storage totaled 3 Bcf during the storage report week. These withdrawals contrast with the five-year (2011-15) average net injection of 22 Bcf and last year’s net injection 49 Bcf during the storage report week—the first full week of the injection season, which traditionally begins on April 1. As a result, the surplus compared with the five-year average declined 25 Bcf to 849 Bcf, and the surplus compared with year-ago levels decreased by 52 Bcf to 956 Bcf.

Natural gas interests focused intently on the recent rally in crude oil. Higher crude oil prices raised expectations that higher natural gas prices ought to follow. The number of rigs operating in the United States has been falling without much discernable impact on supply. This reflects more efficient drilling capability and getting more with less.

One analyst has figured what this means for the Eagle Ford play in Texas. He points out that “the productivity of the average well as measured by the 2nd month of production increased from about 2.7 million cubic feet per day (MMcf/d) to over 4 MMcf/d,” despite rig counts falling from around 35 to 15 units. This is a remarkable increase per well, with Eagle Ford output remaining essentially flat. Rigs in the region have now fallen to around ten units.

Trends reverse at some point and that is the question for domestic natural gas production now. Numbers of rigs are nearing minimums and production nationally has been falling. Lower output and the prospect of a significant demand uptick on the horizon should result in higher prices. Timing remains uncertain.

Estimates of dry gas output needed to meet projected demand by the end of 2017 exceed more than 80 Bcf/d, but this is in the future. For now, fewer rigs, fewer workers and greater financial strain on producers are in the cards.

 

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