An Increasingly Large Share of U.S. Distillate Production is Exported

U.S. distillate exports have continued to increase significantly over the first part of 2017, setting record highs for three consecutive months from May through July (Figure 1) before declining in August (at least partially as the result of hurricane activity). At the same time, U.S. distillate demand was relatively stable, increasing only slightly from January through July 2017 compared with 2016 levels.

Although January through July 2017 average exports of distillate to Europe fell compared with the same period in 2016, U.S. refineries in the Gulf Coast are geographically well positioned to export to Mexico and to countries in Central and South America, and distillate exports to these locations increased. In addition to increased export demand, high distillate crack spreads (the difference between distillate prices and crude oil prices) encouraged refinery runs. During this period, overall demand outpaced production and inventories fell.

While the January-through-July average distillate product supplied (a proxy for demand) increased slightly, from 3.8 million barrels per day (b/d) in 2016 to 3.9 million b/d in 2017, the growth in exports increased more quickly. From January through July 2017, U.S. distillate exports averaged 1.4 million b/d, nearly 195,000 b/d more than in the same period in 2016.

Distillate exports from the United States set record highs in May, June, and July 2017, reaching 1.5 million b/d, 1.6 million b/d, and 1.7 million b/d, respectively. In August, exports of distillate fell to 1.4 million b/d, due at least partially to Hurricane Harvey, which made landfall in Texas as a Category 4 hurricane on August 25 and resulted in port closures. August data reflects the significant impact of hurricanes this year and may not be indicative of distillate demand or export trends. As exports of distillate have increased, they have accounted for a larger share of net production (Figure 2).

U.S. distillate exports were destined primarily for countries in Central and South America, Europe, and North America. The proximity of U.S. Gulf Coast refineries to Mexico and to Central and South America, combined with these regions’ high demand and recent refinery shutdowns, led to strong U.S. distillate exports to these locations. Exports to North America increased by 61,000 b/d compared with January through July 2016, reaching 249,000 b/d over the same period in 2017. From January through July 2017, exports to Central and South America averaged 760,000 b/d, an increase of 120,000 b/d compared with the same period in 2016.

The largest single recipient of U.S. distillate exports from January through July 2017 was Mexico (228,000 b/d), followed by Brazil (183,000 b/d) and the Netherlands (102,000 b/d). For North America, although exports to Canada decreased by 15,000 b/d compared with the same months in 2016, exports to Mexico increased by more than 76,000 b/d. Distillate exports to Brazil increased by 83,000 b/d from 2016 levels to 183,000 b/d in 2017. Trade press reports indicate that the decision by Brazil’s state-controlled oil company, Petroleo Brasileiro SA, to raise diesel prices in April, combined with competitive tanker rates, supported U.S. exports to Central and South America.

Despite refinery outages in Europe, average U.S. distillate exports to the region decreased in 2017 compared with 2016. January through July 2017 exports to Europe averaged 280,000 b/d, nearly 42,000 b/d lower than the average for the same period last year. Despite decreasing overall, exports to Europe rose rapidly in July, reaching 462,000 b/d (Figure 3), with exports to the Netherlands reaching 231,000 b/d (the highest level since November 2013) and exports to France reaching 120,000 b/d (the highest level since April 2016). Combined exports to France and the Netherlands accounted for nearly 60% of U.S. distillate exports to Europe over the first seven months of 2017, but exports to each country averaged 6,000 b/d lower than their 2016 levels despite the sharp increases in July 2017. According to trade press reports, Europe is receiving distillate from a more diversified group of suppliers, decreasing the U.S. market share. If the United States continues to lose European market share, distillate exports to Central and South America may increase faster than otherwise expected.

Stable distillate demand in the U.S. combined with increasing exports support increasing production of distillate in the United States. The 2017 average refiner and blender net production through July was 5.0 million b/d, 233,000 b/d higher than in the same months last year.

Distillate crack spreads have been relatively strong through July 2017, when compared with last year, supporting higher production levels. The New York Harbor crack spreads averaged $0.31 per gallon (gal) through July 2017, nearly $0.04/gal higher than in the same period last year. The Gulf Coast crack spread averaged $0.29/gal through July 2017, more than $0.08/gal higher compared than in the same period in 2016. Although higher crack spreads have supported increased production, distillate inventories are down slightly compared with last year. U.S. distillate inventories through July 2017 averaged 156 million barrels, nearly 0.9 million barrels lower than 2016 levels. High levels of U.S. exports supported by lower tanker rates may continue to put downward pressure on distillate inventories despite high refinery runs.

U.S. Average Regular Gasoline and Diesel Prices Increase

The U.S. average regular gasoline retail price increased 1 cent from the previous week to $2.49 per gallon on October 30, up 26 cents from the same time last year. The Midwest price increased over three cents to $2.43 per gallon and the West Coast and East Coast prices each increased less than one cent, remaining at $2.93 per gallon and $2.45 per gallon, respectively. The Rocky Mountain and Gulf Coast prices each fell one cent to $2.52 per gallon and $2.22 per gallon, respectively.

The U.S. average diesel fuel price increased 2 cents to $2.82 per gallon on October 30, 34 cents higher than a year ago. The Midwest price increased three cents to $2.81 per gallon, the Rocky Mountain and Gulf Coast prices each increased nearly three cents to $2.94 per gallon and $2.64 per gallon, respectively, and the West Coast and East Coast each increased over one cent to $3.11 per gallon and $2.81 per gallon, respectively.

Propane Inventories Decline

U.S. propane stocks increased by 0.7 million barrels last week to 78.3 million barrels as of October 27, 2017, 5.9 million barrels (7.0%) lower than the five year average inventory level for this same time of year. Gulf Coast, East Coast, and Midwest inventories increased by 0.5 million barrels, 0.3 million barrels, and 0.1 million barrels, respectively, while Rocky Mountain/West Coast inventories decreased by 0.1 million barrels. Propylene non-fuel-use inventories represented 3.2% of total propane inventories.

Residential Heating Oil and Propane Prices Continue to Increase

As of October 30, 2017, residential heating oil prices averaged $2.70 per gallon, nearly 3 cents per gallon more than last week and 36 cents per gallon higher than last year’s price at this time. The average wholesale heating oil price for this week is over $1.95 per gallon, 6 cents per gallon more than last week and 34 cents per gallon higher than a year ago.

Residential propane prices averaged $2.30 per gallon, 2 cents per gallon more than last week and 24 cents per gallon higher than a year ago. Wholesale propane prices averaged just over $1.07 per gallon, nearly 7 cents per gallon more than last week and 39 cents per gallon higher than last year’s price.