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REGIONAL VIEWS Dan Luther,
Overview
Director, Supply Optimization See his bio, page 34
PADD 1A & B East Coast
Northeast distillate buyers should expect limited local stocks to keep prices strong relative to NYMEX futures. Keep an eye to area temperatures as an extended or extreme cold snap could send prices higher due to regional heating demand. •
Falling Distillate Inventories Induce Higher Prices Northeast fuel buyers continued to feel the pinch of a regional refinery closure as area distillate inventories dropped well below the five-year range. According to the EIA, PADDs 1A and 1B distillate inventories dropped as low as 24 million barrels at the end of October, nearly 40% below the previous five-year average. While inventories remained below the average throughout 2019, they turned markedly lower in late-September, trending below the five-year low throughout Q4.
Northeast Distillate Inventories
Source: Energy Information Administration (EIA) Weekly Petroleum Status Report
Traders took notice of the lower inventories which contributed to a change in the pricing structure of NYMEX diesel futures. Prices are currently in a backwardated structure, meaning prices in the future are lower than current fuel prices. This structure incentivizes traders to sell from inventories now, since product values will fall in the future. The result is more product available to the market now, but also declining inventories and higher prices in the future. The previous two times that spreads reached these levels were in January 2018, when an unusually cold weather event known as a bomb cyclone occurred, and September 2017, when Hurricane Harvey disrupted Gulf Coast refineries and their supply chains. These events put short-term pressure on distillate supply, which disrupted near-term supply prospects more than the longerterm supplies, creating significant backwardation. With inventories quite low, however, an extended cold weather event like the January 2018 bomb cyclone could cause significant heating oil price increases. The price impact would spread to the Southeast as product is drawn to the north, leaving less product to go around and causing diesel prices to spike. •
Northeast Wrestles with PES Outage Implications The effects of the Philadelphia Energy Solutions July refinery closure on Northeast diesel supplies exacerbated a seasonally tight time for supply. The plant had a capacity of 335 kbpd of production of which roughly 100 kbpd was distillate output. Inventories did not immediately drop on the unexpected summer closure since some supplies can reach the Northeast from the Gulf Coast or via international imports from Europe. While the PADD 3 Gulf Coast has plenty of excess refining capacity, there is limited pipeline infrastructure to
transport significantly more fuels from the Gulf Coast to the Northeast. As seasonal demand for heating oil increases in the Northeast, the region will have to be supplied from elsewhere. For instance, the recent implementation of bidirectional flow on the Laurel pipeline allowing Midwest shipments into Central Pennsylvania will offset some diesel that traditionally left the core Northeast. Additionally, weekly imports of distillate fuels increased more than 200 kbpd in early November as US prices escalated more than local European values. Higher US prices incentivize international traders to take advantage of the arbitrage by sending shipments across the Atlantic. Ultimately, suppliers and consumers will need to keep an eye on distillate imports into the US to resolve the low Northeast inventory levels. • 22
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