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Midwest distillate inventories are increasing

Hydrocarbon Engineering,

According to the US Energy Information Administration (EIA), distillate inventories in the Midwest (PADD 2) were 21.9 million bbls as of 12 November, the lowest level on record since EIA began publishing weekly estimates for the region in 1990. Inventories in the region typically draw down quite steeply in autumn, but this year’s decrease was particularly pronounced due to the coincident timing of a large harvest, planned refinery maintenance and unplanned disruptions to refinery operations. With the harvest mostly complete, and refinery utilisation rates returning to higher levels, inventories are increasing. As of 28 November, Midwest distillate inventories were 23.7 million bbl.

Unlike the Northeast, where 24.7% of homes rely on distillate fuel for home heating, only 1.3% of Midwestern households use distillate fuel for space heating. In the Midwest, the seasonal uptick in distillate demand is related mostly to agricultural use. Much of the region is dedicated to farming and distillate fuel, specifically ultra low sulphur diesel (ULSD), is the primary fuel for farm equipment (tractors, combines, and harvesters). While PADD 2 is responsible for approximately 30% of total US distillate consumption, it accounts for over 50% of national distillate use in farming.

In the Midwest, ULSD consumption traditionally peaks in October with the annual harvest of corn, wheat, soybeans, sugar beets and other agricultural commodities. Last October, PADD 2 consumption of ULSD fuel, as measured by prime supplier sales volumes, reached 1.3 million bpd, more than 100 000 bpd above the prior three year October average. The Department of Agriculture projects that this year’s corn harvest, when complete, will be slightly larger than last year’s and the soybean harvest is also expected to be near record levels. AS a result, diesel demand driven by the harvest season is expected to be higher as well. Additionally, the anticipation of a larger corn harvest caused prompt corn prices to fall below prices for corn several months in the future (contango), encouraging farmers to harvest later in order to capture higher prices. This delay resulted in a concentration of harvest activity between 26 October and 15 November, a period during which planned refinery maintenance and an unexpected pipeline disruption caused PADD 2 production of distillate fuel to decline.

Refineries typically schedule maintenance when refined petroleum product consumption is low, i.e. in the fall and in the first quarter when there is less demand for transportation fuels. Midwest refineries had been running at record levels throughout the summer but began cutting rates in September, after the end of the peak summer driving season. PADD 2 refinery utilisation dropped from 97.5% for the week ending 5 September to 82% for the week ending 24 October. In addition to planned maintenance, operational issues with a crude pipeline that supplies Ohio refineries caused unplanned reductions in crude runs at some facilities in late October. This year’s seasonal reduction in runs occurred a few weeks later than in recent years and was larger because of the higher summer utilisation rates.

Midwest distillate inventory patterns typically reflect the annual cycle of harvest demand and refinery maintenance, but the impact was more pronounced this year, because the two overlapped. This year’s seasonal stock draw started off in line with recent years and the five year average. But in late October, the combination of a very large, late harvest and late season refinery maintenance drove distillate inventories below the five year range.

In addition to in-region refinery production of distillate, the Midwest is typically supplied with distillate from other US regions, primarily the Gulf Coast. When Midwest supplies are tight, as has been the case since October, spot ULSD prices in Chicago move about those on the Gulf Coast, prompting northbound shipments on petroleum product pipelines connecting the two regions.

The early onset of low temperatures also affected Midwest distillate supply. ULSD, the most widely used distillate fuel for transportation and farm use, must be winterised for use in very cold temperatures. Winterisation ensures that distillate fuel will flow at cold temperatures and can be accomplished by blending ULSD with kerosene or No. 1 diesel fuel, or chemical additives. Typically, winterised ULSD is not needed until the coldest months of January and February, and as a result kerosene and winterisation additives are not stocked until then. This year, because cold temperatures arrived early and suddenly, there have been shortages of kerosene that have translated into shortages of winter grade ULSD.

With the corn harvest almost complete, distillate demand should decline, and with refinery maintenance concluding, distillate production is already increasing. As a result, Midwest distillate inventories have begun to increase as well.

Adapted from a press release by Emma McAleavey.

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