OMAHA -- Hurricanes Gustav and Ike not only packed a wallop on people living in the Gulf Coast states. They also left their mark on gasoline and distillate production—which includes diesel—according to a Tuesday Web cast hosted by DTN, which provided a market outlook for diesel fuel and heating oil.
Before the hurricanes hit, distillate production by domestic refineries increased substantially as refiners shifted output to meet strong import demand and simple economics. After the hurricanes, it was a much different story, as refiners sought to catch up on the gasoline side.[image-nocss]
"During the weekend of September 19, refineries operated at their lowest run rate vs. capacity—66.7%—in more than 20 years, according to data from the EIA," noted co-presenter Brian Milne, editor of refined fuels for DTN, Omaha. The Energy Information Administration(EIA) estimates that 46 million barrels of production were lost because of hurricane disruptions through that weekend.
Gasoline supply fell to 178.7 million barrels as of September 19, or 9.6% below levels a year ago, and the lowest level of gasoline held by the United States since August 1967, Milne said. The result: "The low run rate, coupled with more production focused on gasoline, will limit supply rebuilding for distillates—the opposite of what took place earlier in the year."
Meanwhile, on the demand side, the numbers are soft. Demand for distillates fell below the five-year average because of the hurricanes, Milne said, although it was already weakening. "Demand for distillates is running 141,000 barrels per day—3.3% below a year ago—in 2008 compared to 2007," he observed. "During the four-week period that ended September 19, distillate demand was 230,000 barrels per day, or 5.5% lower than the rate during the same period in 2007."
Long-term, however, distillate production is looking much more attractive to refiners than gasoline, Milne noted.
"The premium held by heating-oil futures over crude oil illustrates the increasing economic incentive for refiners to shift their yield to distillate production," he said. "While hurricanes have disrupted a higher rate for distillate production now, the trend for a higher heat crack will continue as demand increasingly shifts toward the middle of the barrel, or distillate fuels."
Milne said it's not clear whether the focus toward exporting diesel will be the same in 2009 as it was earlier this year, although the trend is likely to continue. New refining capacity coming online in Asia at the end of this year should compete against U.S. refiners for European demand; however, the economic crisis, creeping globally, "would lower demand and this muddy forward picture for exports," he said.
Expect biodiesel demand to continue to increase slowly. Currently, high feedstock costs are depressing demand, Milne said; however, with the Renewable Fuels Standard mandating an expansion in biofuels production in 2009, this should "give industry a strong shot in the arm," along with the long-awaited approval of biodiesel fuel standards by ASTM International, which should increase acceptance.
During a question-and-answer session, Milne was asked what impact pending financial bailout legislation would have on the fuel outlook.
"If [legislation] doesn't go through, the expectation is that as credit continues to dry up, businesses will start to have trouble, some will fail, and how it impacts our industry is demand will move lower," Milne said. "The trend in 2008, for the most part, has been lower demand, especially for gas, and in the latter part of the year, pronounced for diesel. The impact of a greater demise to the economy globally would affect other engines of support in Asia and Europe, and that would crimp back demand, and prices would fall."
Co-presenter Tom Devine, general manager of fuel oil with Devine Brothers Inc., Norwalk, Conn., a supplier of heating oil and biodiesel, said his company is already seeing a direct impact from the economic fallout and credit crisis.
"The credit crunch has impacted our business tremendously thus far," he said. "We're becoming very, very strict with the credit we give out in terms of buying product for the next year."
While Devine is working with credit-card companies and local banks to forward to customers low-interest energy loans, "the credit crunch in terms of borrowing money to buy the oil is also going to hit an awful lot of retailers and jobbers if they haven't set up proper loans with banks yet."
Co-presenter Hugh McNaughton with Sprague Energy Corp., Portsmouth, N.H., a supplier of heating oil, diesel, gasoline and natural gas, noted that the credit crunch has "given an absolute increase in the cost of carrying inventory."
"Our financiers are also asking for additional assurances and returns on the loans they make," he said. "We have to work that much harder to justify inventory."
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