US refiners struggle to export surplus distillate
3/3/2016 12:00:00 AM
By John Kemp
LONDON, March 3 (Reuters) -- US exports of distillate fuel oil have been basically flat since 2013, ending years of strong growth, as US refiners face stiff competition from big new refineries in Asia and the Middle East and sluggish demand.
US distillate exports increased at a compound annual rate of just 2.3% in 2014/15, down from a compound annual rate of nearly 30% between 2004 and 2013.
Exports amounted to 1.19 million bpd in 2015, little changed from 1.13 million in 2013, according to the US Energy Information Administration.
By contrast, over the previous nine years, exports increased 10-fold, from just 110,000 bpd in 2004.
The stagnation in distillate exports reflects sluggish world trade, the slump in mining, and a warm winter across much of the northern hemisphere, all of which have cut global demand growth.
Until recently, exports markets were becoming increasingly important to the profitability of refineries in the US.
Between 2004 and 2013, US refineries boosted the production of middle distillates by almost a quarter from 3.8 million bpd to 4.7 million bpd.
Refineries processed increasingly distillate-rich crudes and optimized their units to maximize the yield of middle distillates used as road diesel and heating oil.
The yield of distillate fuel oil rose by six percentage points from 23.9% in 2004 to 29.9% in 2014, according to the US Energy Information Administration.
But the problem with the refining business is that it is strongly cyclical and there is a long lead time between planning upgrades and new units and them coming onstream.
US refiners face increasing competition from the large new refineries in Saudi Arabia and other parts of Asia which are also focused on distillate production for export.
Extra capacity has come onstream just when the balance of the global fuel market has shifted, with gasoline consumption growing strongly while distillate demand growth has slowed.
In the US, China and India gasoline demand is growing fast, but distillate demand is moribund or down.
Refineries in the US and much of the rest of the world, planned during the years of strong freight and industrial demand, are producing the wrong slate of fuels, too much distillate and not enough gasoline.
With a global oversupply of distillates, US refiners have been unable to export their way out of the problem by marketing more fuel overseas.
US distillate stockpiles began soaring from May 2015 and ballooned between November 2015 and February 2016 as warm weather cut heating demand.
US distillate stockpiles now stand at a massive 48 days worth of domestic consumption, up from 29 days last year, and a long-term average of around 32 days at this time of year.
The passing of El Nino should give a boost to distillate demand later this year since temperatures next winter are unlikely to be as mild as they were in 2015/16.
But on its own that is unlikely to be enough to cure the distillate problem, which is part structural and part weather-related.
Unless global economic activity and freight transportation pick up strongly, the oversupply of distillates could hang around for some time, weighing on margins.
After years in which refineries were rewarded for producing as much distillate as possible, the incentive structure in the short term will reward refineries that produce lots of gasoline.
(Editing by David Evans)
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