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Trader's Corner
This week’s Trader’s Corner looks at falling distillate inventory.
We know that many of you deal in heating oil as well as propane. Even if you just deal in propane, this data will let you know it is not just propane that is getting exported.
This past week, the Energy Information Administration (EIA) reported a significant 4.513-million-barrel draw on distillate inventory. Distillates include heating oil.
A few years ago, when the new standard for diesel went into effect, it largely made historic looks at heating oil inventory irrelevant. Most refiners are fulfilling heating oil demand with lower sulfur content distillates. Below is how high sulfur (500 ppm or higher) heating oil inventory looks currently. Click to enlarge.
That inventory picture looks bullish. However, the next chart shows the changes in production that have created the rapid decrease in the supplies of high sulfur content distillates. Click to enlarge.
The amount of high sulfur product produced has gone from an average of 1.049 million barrels per day (bpd) in 2005 to a 0.319-million-bpd average so far this year. High sulfur distillates are now less than 8 percent of total production.
The bottom line is that refiners had to improve the specification on diesel, which reduced the amount of high sulfur output. Heating oil demand, which historically was high sulfur in content, is in many cases lower in sulfur content these days. The reason is not a government requirement, like with diesel, but simply due to the change in the refining process to make the higher standard diesel.
All of the above is to justify why we no longer look very closely at heating oil inventory, but look at the overall situation with total distillates instead. It is true that the total has a lot of product that would never be used as heating oil, but it still gives a better picture, we believe, of the product to potentially fulfill home heat demand than heating oil inventory alone. We could make really bad decisions on our heating oil purchases if we just let the state of heating oil inventory drive our buying decisions.
Now for the current state of distillate inventory (click to enlarge):
Distillate inventory is very low. Below is part of the reason. Click to enlarge.
The chart has the last two years of import and export data for distillates. The EIA didn’t even track U.S. exports of distillates until mid-2010, and they totaled only 450,000 bpd in the first month of reporting. Now distillate exports regularly run more than a million bpd.
At the same time, imports have fallen off. For example, in 2007 (before the recession), the import rate was 294,000 bpd to an average of 125,000 bpd last year. Imports have averaged 178,000 bpd so far this year, but that is not far above the average over the same period last year, when 162,000 bpd were imported.
Distillate demand is up some since last year as well, but the import/export activity is a big factor in the low inventory position.
We have had a few conversations with propane retailers upset over sending “our propane” overseas. It is not just propane. It is most all petroleum products. Low WTI to Brent pricing allows U.S. product to compete on the global energy market like never before.
Not too long ago, it was a one-way street, with crude and products all heading our way. But today, it is a two-way street. As long as U.S. crude and natural gas production is rising and WTI crude is pricing below Brent, the traffic in the outbound lane is going to be steady to increasing.
Whether we sell propane or heating oil, the market just won’t allow us to take advantage of an oversupply/undervalue situation for long. Market forces are always at play to put things in balance. It is truly a global energy market.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at info@propanecost.com. |
