Fuels News had an interesting story today that highlights something we are seeing across the industry this winter – scarce diesel supply. With the coldest winter any of us can remember it is no surprise that we are using more diesel than we have in years since it is also consumed as heating oil. We are now substantially below our 5 year range for days of supply and may not have seen the bottom yet.
This ramp in demand is driving inventories down and causing some real pain points in the supply chain. The outcome is predictable, right, higher prices. As reported last Friday in Fuels News we have seen diesel prices rise and while the price of diesel is always going to move in line with crude oil overall it is subject to it’s own supply/demand balance and right now we have in imbalance in diesel that has nothing to do with crude oil.
The steady decline in distillate inventories across the nation — particularly in the Northeast, drove me to ask a follow on question. How much diesel are we making now relative to the history of US refining production? Well as it turns out the refining industry has been tilting towards greater diesel output for quite some time. The chart below, which I pulled from EIA data on US refinery yields shows that we’ve boosted diesel yield by a total 30% over the past 20 years, and by over 20% just in the past 10 years.
That is a LOT more diesel than we used to get out of a barrel of oil at 13 gallons per barrel compared with 9 gallons in 1993. So what gives, where is all that diesel going? Well that gives rise to another interesting angle that has also been growing like crazy, exports. We used to import lots of gasoline and a little diesel, not anymore folks, we are supplying much of the western hemisphere with refined products.
This is overall a good thing I think. These exports keep that refining margin here in this country and allow US refiners to continue making investments in producing cleaner fuels more efficiently. In fact one of the most interesting numbers in all that EIA refinery yield data is the processing gain that US refiners are seeing today. Compared with the less complex refining practices of 20 years ago refiners now gain 1.3% more from each bbl than they used to.
1.3% doesn’t sound like much, but that is over 9 million gallons of additional refined products per day from the US fleet of refineries. What’s even better is that most of that processing gain is based on using more US natural gas production which is of course much cheaper than the bbls of equivalent volume in crude. So that feed stock price advantage and superior complexity gives our refiners an edge in the world marketplace in more ways than one.
These analysis are all well and good. Would like to have seen a duty chart for the countries where we are shipping refined goods. Other countries are primarily public transportation “centric” , that puts the US at a significant disadvantage. We committed to the highway system in the 30’s and have failed to protect the driver, fuel prices. The bottom line is that adjusted for inflation, finished products should be in the $1.80 range. Until that happens the US economy cannot and will not recover as a whole.
With more gas/condensate at lower price to refineries in US, API of combined refinery feed is expected to improve and should help in getting more distillate at lower severity of operation/lower fuel and loss and operating cost. Thus all factors are in favor of US refineries and challenge for other refineries in world and Particularly in Europe and Asia. Technology should give solution to this challenge and support healthy competition to help consumers on the whole.