Distillate (including diesel) is the second largest petroleum product consumed in the United States, used for everything from fuel for trucks and trains to residential heating and even a small amount of power generation. Although still overshadowed by gasoline consumption within the United States, global trends have been rapidly increasing the demand for distillate. This is causing major changes in the United States’ role in the world distillate market.
For many years, the United States was a net importer of relatively small volumes of distillate, primarily from Canada and the Virgin Islands (Figure 1). Imports were generally seasonal, coinciding with greater demand for heating oil during the winter heating season when additional supplies from areas like Eastern and Western Europe and Latin America would occasionally surge.
This trade pattern changed significantly in the spring, summer, and fall of 2008 as wholesale prices for distillate soared above those for gasoline. Distillate prices have rarely been higher than gasoline during the summer months but, the summer of 2008 saw an unprecedented and sustained premium for distillate. A variety of factors were behind the unusually high margins. In South America, price controls were limiting Argentina’s production and export of natural gas, and a severe drought in Chile was reducing its hydroelectric generation. Distillate fuel for electrical generation was a convenient short-term substitute for these shortages. Prices began to rise quickly in the face of this extra demand, but several prominent distillate consumers, including China and India, shielded their domestic consumers from the increased costs through fuel subsidies and price controls. The normal economic process of higher prices encouraging reduced consumption was therefore muted or absent in these countries.
With distillate selling for more than gasoline from August 2007 through February 2009 (except during the hurricanes in September 2008), domestic refiners continued to increase distillate yields in 2008, nearly reaching an unprecedented 30 percent by the end of 2008 (Figure 2). From June through August 2008, distillate yields averaged almost 3 percent higher than typical, which resulted in about 380 thousand barrels per day of additional distillate production – a volume that was more than 10 percent of total U.S. distillate demand during those months. This extra production was occurring despite the fact that domestic demand had fallen over 9 percent compared to the previous year. Refiners were responding to a global, not a domestic, opportunity, continuing a dynamic that began in mid-2007. The United States became a distillate exporter, especially to South America and Western Europe. Net exports peaked in August 2008 at about 740 thousand barrels per day, before falling to some extent later in the year in the face of the coming winter heating season and a significant decline in wholesale prices due to the global economic downturn.
In 2009, the distillate market has returned somewhat toward earlier behavior. Distillate has once again been selling at a discount to gasoline this year as the world economy struggles. However, the United States has remained an exporter of distillate fuel. Net exports through July have averaged about 350 thousand barrels per day compared to almost 275 thousand barrels per day for the same period in 2008.
The results of these market changes are not easy to predict. Many of the issues that led to last summer’s distillate market swings are not expected to repeat regularly, but the broad trends are informative. The Energy Information Administration, the International Energy Agency, and others continue to project global distillate demand growing much faster than gasoline, especially in the developing world. The United States may therefore remain a distillate exporter for some time.
For many years, the United States was a net importer of relatively small volumes of distillate, primarily from Canada and the Virgin Islands (Figure 1). Imports were generally seasonal, coinciding with greater demand for heating oil during the winter heating season when additional supplies from areas like Eastern and Western Europe and Latin America would occasionally surge.
This trade pattern changed significantly in the spring, summer, and fall of 2008 as wholesale prices for distillate soared above those for gasoline. Distillate prices have rarely been higher than gasoline during the summer months but, the summer of 2008 saw an unprecedented and sustained premium for distillate. A variety of factors were behind the unusually high margins. In South America, price controls were limiting Argentina’s production and export of natural gas, and a severe drought in Chile was reducing its hydroelectric generation. Distillate fuel for electrical generation was a convenient short-term substitute for these shortages. Prices began to rise quickly in the face of this extra demand, but several prominent distillate consumers, including China and India, shielded their domestic consumers from the increased costs through fuel subsidies and price controls. The normal economic process of higher prices encouraging reduced consumption was therefore muted or absent in these countries.
With distillate selling for more than gasoline from August 2007 through February 2009 (except during the hurricanes in September 2008), domestic refiners continued to increase distillate yields in 2008, nearly reaching an unprecedented 30 percent by the end of 2008 (Figure 2). From June through August 2008, distillate yields averaged almost 3 percent higher than typical, which resulted in about 380 thousand barrels per day of additional distillate production – a volume that was more than 10 percent of total U.S. distillate demand during those months. This extra production was occurring despite the fact that domestic demand had fallen over 9 percent compared to the previous year. Refiners were responding to a global, not a domestic, opportunity, continuing a dynamic that began in mid-2007. The United States became a distillate exporter, especially to South America and Western Europe. Net exports peaked in August 2008 at about 740 thousand barrels per day, before falling to some extent later in the year in the face of the coming winter heating season and a significant decline in wholesale prices due to the global economic downturn.
In 2009, the distillate market has returned somewhat toward earlier behavior. Distillate has once again been selling at a discount to gasoline this year as the world economy struggles. However, the United States has remained an exporter of distillate fuel. Net exports through July have averaged about 350 thousand barrels per day compared to almost 275 thousand barrels per day for the same period in 2008.
The results of these market changes are not easy to predict. Many of the issues that led to last summer’s distillate market swings are not expected to repeat regularly, but the broad trends are informative. The Energy Information Administration, the International Energy Agency, and others continue to project global distillate demand growing much faster than gasoline, especially in the developing world. The United States may therefore remain a distillate exporter for some time.
