Distillate Fuel Oil Becoming Focus of Future Growth
- Up thrust of ULSD prices supported by strong demand
- ULSD prices rally despite higher crude oil production
- Maritime fleets to convert to Low-Sulfur Distillate Fuels
- Natural gas nearing breakout of resistance
The Matrix
ULSD futures bottomed at $0.85 in January, 2016. Prices have moved higher since then, topping at $2.14 almost precisely two years later, reaching $2.14 before setting into a correction. ULSD is now trading around $1.99.
The up thrust of distillate prices has persisted despite the historic expansion of U.S. crude oil production. (A modestly new high output level of 10.433 million barrels daily was reported for the week ending March 23, 2018.) And current demand, 4.4 million barrels per day, is closer to typical winter requirements than the needs of early spring.
The forward curve of ULSD prices points higher as well. Prices through winter, 2019 congregate around $1.99. The following winter shows lower prices (around $1.98,) and $1.95 in January, 2021.
ULSD demand is likely to be supported even more going forward. One reason for this comes from the International Maritime Organization (IMO.) IMO has determined to require a global sulphur cap of 0.5% in 2020 on the world shipping fleet.
Maritime bunker fuel use runs about four million barrels daily. Currently, this market is largely served by heavy fuel oil. The International Energy Agency estimates three-quarters of the bunker market will switch to distillates, imposing significant new demand on refineries.
Additional bullish pressure on distillate fuels could come from growth in the aviation sector. Demand for jet fuel is expected to grow rapidly, reflecting analysis of flight schedules and global passenger capacity. This comes as other distillate demand grows, with bullish implications for price. Some analysts project distillate crack spreads to grow around $2 in 2019 and another $2 in 2020 as competitive bunker fuel reforms take hold. Even now, distillate crack spreads are growing. The June 2018 crack bottomed on March 12 at $17.20. At writing, less than three week later, this spread is challenging $20.
Supply/Demand Balances
Supply/demand data in the United States for the week ending March 23, 2018 were released by the Energy Information Administration.
Total commercial stocks of petroleum fell 1.6 million barrels during the week ending March 23, 2018.
There were draws in stocks of gasoline, fuel ethanol, distillates, and propane. Builds were reported in stocks of K-jet fuel, residual fuel, and other oils.
Commercial crude oil supplies in the United States increased to 429.9 million barrels, a build of 1.6 million barrels.
Crude oil supplies increased in four of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks rose 0.3 million barrels, PADD 2 (Midwest) crude stocks advanced 3.4 million barrels, PADD 4 (Rockies) stocks climbed 0.2 million barrels, and PADD 5 (West Coast) stocks grew 2.8 million barrels. PADD 3 (Gulf Coast) stocks declined 5.2 million barrels.
Cushing, Oklahoma inventories increased 1.8 million barrels from the previous report week to 31.2 million barrels.
Domestic crude oil production increased 26,000 barrels daily to 10.433 million barrels per day from the previous report week.
Crude oil imports averaged 8.148 million barrels per day, a daily increase of 1.071 million barrels. Exports rose 5,000 barrels daily to 1.578 million barrels per day.
Refineries used 92.3 per cent of capacity, an increase of 0.6 percentage points from the previous report week.
Crude oil inputs to refineries increased 18,000 barrels daily; there were 16.795 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 121,000 barrels daily to 17.129 million barrels daily.
Total petroleum product inventories saw a decrease of 3.2 million barrels from the previous report week.
Gasoline stocks decreased 3.5 million barrels from the previous report week; total stocks are 239.6 million barrels.
Demand for gasoline fell 116,000 barrels per day to 9.208 million barrels daily.
Total product demand increased 241,000 barrels daily to 20.917 million barrels per day.
Distillate fuel oil supply fell 2.1 million barrels from the previous report week to 129.0 million barrels.
National distillate demand was reported at 4.375 million barrels per day during the report week. This was a weekly increase of 458,000 barrels daily.
Propane stocks decreased 1.2 million barrels from the previous report week to 35.6 million barrels. Current demand is estimated at 1.326 million barrels per day, an increase of 84,000 barrels daily from the previous report week.
Natural Gas
According to the Energy Information Administration:
Working gas in storage was 1,383 Bcf as of Friday, March 23, 2018, according to EIA estimates. This represents a net decrease of 63 Bcf from the previous week. Stocks were 672 Bcf less than last year at this time and 346 Bcf below the five-year average of 1,729 Bcf. At 1,383 Bcf, total working gas is within the five-year historical range.
Natural gas futures have moved higher after testing recent lows at $2.56 on Monday, March 26th. Indeed, prices added twenty cents to value during that week. On publication of this weekly withdrawal estimate, spot futures lost ground because the industry expected a larger decline in stocks. The May natural gas futures contract finished the week at $2.733, a weekly increase of more than 17 cents and close to resistance at $2.81.
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