Distillate in Depth – The Supply, Demand, and Price Picture Distillate in Depth – The Supply, Demand, and Price Picture John Hackworth Joanne Shore Energy.

Distillate in Depth – The Supply, Distillate in Depth – The Supply, Demand, and Price PictureDemand, and Price Picture

John Hackworth

Joanne Shore

Energy Information Administration

Winter Fuels Conference

October 12, 2005

www.eia.doe.govwww.eia.doe.gov

Distillate and Gasoline Relationships --Distillate and Gasoline Relationships --Temporary or Fundamental Change?Temporary or Fundamental Change?

• Unusual distillate and gasoline prices in 2005 – Not just a U.S. issue

• Explore Europe/US light product supply/demand balance to illustrate market dynamics– Europe’s product imbalance– U.S. product imbalance– How they fit together

• Current distillate market and supply response

2005: Continuation of High Product 2005: Continuation of High Product Prices – Especially DistillatePrices – Especially Distillate

-250

255075

100125150175200225

Ja

n-9

9

Ja

n-0

0

Ja

n-0

1

Ja

n-0

2

Ja

n-0

3

Ja

n-0

4

Ja

n-0

5

$/B

arr

el

U.S. New York Monthly Average Spot Prices

Gasoline

No. 2 Heating Oil

Gasoline - No. 2 Heating Oil

Note: Gasoline is conventional regular

Source: Bloomberg

Unusual 2005 Distillate Prices Unusual 2005 Distillate Prices InternationallyInternationally

-30

-20

-10

0

10

20

30

40Ja

n-9

5

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Ce

nts

Pe

r G

allo

n

Spot Gasoline - Heating Oil Price Differences

NY Harbor

Northwest Europe

Source: Bloomberg NY Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Regular Gasoline

Atlantic Basin 1995-2004Atlantic Basin 1995-2004Business As UsualBusiness As Usual

75

80

85

90

95

10019

95

1996

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Per

cen

t

Capacity Utilization

U.S.

EU-15

Note: European Union-15 (EU-15): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom

Source: IEA

Europe Is Unique In Degree of Shift to Europe Is Unique In Degree of Shift to Middle DistillateMiddle Distillate

40%

45%

50%

55%

60%

65%

70%19

85

1987

1989

1991

1993

1995

1997

1999

2001

2003

Middle Distilate Share of Gasoline and Distillate Consumption

EU-25

World Excl FSU and EU-25

Note: European Union-25 (EU-25): former European Union-15 plus Estonia, Latvia, Lithuania, Czech Republic, Slovakia, Hungary, Poland, Slovenia (beginning in 1992/93), Cyprus, Malta

Source: BP Statistical World Review 2005

EU’s Contribution: Price is Not Just EU’s Contribution: Price is Not Just About Volumes, But Quality As WellAbout Volumes, But Quality As Well

0

5

10

15

20

25M

ay-0

3

Jul-

03

Sep

-03

No

v-03

Jan

-04

Mar

-04

May

-04

Jul-

04

Sep

-04

No

v-04

Jan

-05

Mar

-05

May

-05

Jul-

05

Sep

-05

Cen

ts P

er G

allo

n

Diesel 10ppm-Heating Oil

Diesel 50ppm - Heating Oil

European ULSD - Heating Oil Prices

Note: ULSD is ultra-low sulfur diesel

Source: Bloomberg NWE Barge

Distillate and Gasoline Relationships --Distillate and Gasoline Relationships --Temporary or Fundamental Change?Temporary or Fundamental Change?

• Unusual distillate and gasoline prices in 2005 – Not just a U.S. issue

• Explore Europe/US light product supply/demand balance to illustrate market dynamics– Europe’s product imbalance– U.S. product imbalance– How they fit together

• Current distillate market and supply response

Europe and the U.S. – Example of Europe and the U.S. – Example of International Product TradeInternational Product Trade

• We know the U.S. depends on product imports – especially those from Europe

• Product trade between Europe and U.S has increased from 1995 to 2005

• Working together because it benefits both due to different supply/demand balances

• Distillate product supply concerns may grow more for EU, but impacts U.S.

• Product quality issues important -- but not part of this presentation

EU-15 Demand Mix Projected to See EU-15 Demand Mix Projected to See Declining Gasoline DemandDeclining Gasoline Demand

0

500

1000

1500

2000

2500

3000

3500

4000

1990

1995

2000

2005

2010

2015

Th

ou

san

d B

arre

ls P

er D

ay Diesel Fuel

Gasoline

EU-15 Demand Mix

Source: History IEA; Forecast Purvin & Gertz

European Preference for Diesel Grew European Preference for Diesel Grew Quickly since Late 1990s Quickly since Late 1990s

48.2

0

10

20

30

40

50

Per

cen

t o

f N

ew

Reg

istr

atio

ns

1990 1992 1994 1996 1998 2000 2002 2004

W. Europe Diesel-Fueled Vehicle Share of New Passenger Car Registrations

Source: ACEA www.acea.be

EU Distillate Refining Yield Growing as EU Distillate Refining Yield Growing as Gasoline Yield ShrinksGasoline Yield Shrinks

20

25

30

35

40

45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Yie

ld P

erce

nt

EU-15 Refinery Yields (Production/Crude Inputs)

Gasoline Yield

Distillate Yield

Note: Distillate is heating oil and diesel.

Source: IEA

EU Hydrocracking Growing, But Not as EU Hydrocracking Growing, But Not as Fast as Diesel Demand ShiftFast as Diesel Demand Shift

0

2

4

6

8

10

12

14

16

1819

90

1992

1994

1996

1998

2000

2002

2004

Per

cen

t o

f D

isti

llati

on

Cap

acit

y

FCC (Mainly Gasoline)

Hydrocracking (More Distillate)

EU-11 Capacity As Percent of Distillation

Note: FCC - Fluid Catalytic Cracking

Source: EIA, Oil and Gas Journal

Europe’s Growing Product ImbalanceEurope’s Growing Product Imbalance

-1000

-800

-600

-400

-200

0

200

400

600

800

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Th

ou

san

d B

arre

ls P

er D

ay

EU-15 Product Net Imports

Gasoline Net Exports

Middle Distillate Net Imports

Source: IEA

Europe Using Imports and Exports to Europe Using Imports and Exports to Balance Product Supply: 1995-2004Balance Product Supply: 1995-2004

• Diesel/gas oil imports increased 400 MB/D with 3/4 from Former Soviet Union

• Kero/Jet imports rose 200 MB/D with 56% from Middle East

• Even with large distillate imports, had to export about 400MB/D gasoline to balance

• Three quarters of gasoline exports went to U.S. and 10% to Africa

Source: IEA

Europe: 1995-2004 -- SummaryEurope: 1995-2004 -- Summary

• Diesel demand growing and gasoline demand declining

• European refiners production mix -- too much gasoline, too little diesel

• Hydrocrackers being built to increase diesel yield, but not keeping up with demand shift

• Historically, Europe achieved balance by finding economic import sources for distillates and export destination for gasoline

• Future: Still see increasing gasoline exports for some time – but will economic distillate imports be available – especially ULSD imports?

U.S. Demand Growing for Both Gasoline and U.S. Demand Growing for Both Gasoline and DistillateDistillate

0

2000

4000

6000

8000

10000

12000

1990 1995 2000 2005 2010 2015

Th

ou

san

d B

arre

ls P

er D

ay

U.S. Gasoline & Distillate Demand

Gasoline

Distillate

Source: EIA, Annual Energy Outlook 2005

U.S. Refinery Throughput Has U.S. Refinery Throughput Has Increased to Help Meet DemandIncreased to Help Meet Demand

0

2

4

6

8

10

12

14

16

18Ja

n-9

0

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Mil

lio

n B

arre

ls P

er D

ay

U.S. Refining Capacity & Inputs

Gross Inputs

Operable Capacity

Source: EIA

U.S. Middle Distillate Yield Has U.S. Middle Distillate Yield Has Increased While Gasoline Stayed FlatIncreased While Gasoline Stayed Flat

20

25

30

35

40

45

50

55

60

1990 1992 1994 1996 1998 2000 2002 2004

Yie

ld P

erc

en

t

Gasoline Excl Oxygenates, Butane

Gasoline With Oxygenates, Butane

Middle Distillate

U.S. Gasoline & Middle Distillate Yields

Source: EIA

6500670069007100730075007700790081008300850019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

0200400600800100012001400160018002000

U.S. Gasoline Imports & Production (MB/D)

Total Net Imports

Total Production Excl. Blending Compontent Net Imports

Gasoline Imports Have Supplied Half Gasoline Imports Have Supplied Half Demand Growth in Recent YearsDemand Growth in Recent Years

Source: EIA

Gasoline Import SourcesGasoline Import Sources

• Nearby dedicated suppliers– Canada– Virgin Islands– Venezuela

• Nearby economic sources– Western Europe – symbiotic relationship– Eastern Europe– Latin America– Africa

• Other incremental supply– Middle East and Asia

Western Europe Growing Source of Western Europe Growing Source of Gasoline ImportsGasoline Imports

0

200

400

600

800

1000

120020

00

2001

2002

2003

2004

2005

Th

ou

sa

nd

Ba

rre

ls P

er

Da

y Other

Other Latin America

Brazil

E Europe

Venezuela

W Europe

Virgin Islands

Canada

U.S. Total Gasoline Imports Jan-Jul

Note: Total gasoline is finished product plus blending components.

Source: EIA, Form EIA-814

Low-Sulfur Years

Distillate Imports Become Critical During Distillate Imports Become Critical During Cold Snaps: Relief from Different LocationsCold Snaps: Relief from Different Locations

0

100

200

300

400

500

600

700

800

900

No

v-9

9

De

c-9

9

Ja

n-0

0

Fe

b-0

0

Ma

r-0

0

Ap

r-0

0

No

v-0

0

De

c-0

0

Ja

n-0

1

Fe

b-0

1

Ma

r-0

1

Ap

r-0

1

Th

ou

sa

nd

Ba

rre

ls P

er

Da

y

Other

Far & Middle East

Latin America

Western Europe

Eastern Europe

Canada, Venezuela,Virgin Islands

U.S. Distillate Imports

Source: EIA, Form EIA-814

Winter 99-00

Winter 00-01

United States: 1995-2004 -- SummaryUnited States: 1995-2004 -- Summary

• Gasoline:– Gasoline demand growth met almost equally by

increased throughput and increased imports

– Europe is major source of increased gasoline imports

• Distillate:– Increase in distillate supply mostly from refinery

production -- higher throughput and higher yield

– However distillate imports are critical during unexpected cold snaps

Summary of European and U.S. Summary of European and U.S. BalancesBalances

-1000

-500

0

500

1000

1500

U.S.Gasoline

U.S. Dist + K/J

EU-15Gasoline

EU-15 Dist + K/J

Th

ou

sa

nd

Ba

rre

ls P

er

Da

y

Net ImportsChange

YieldChange

ThroughputChange

How Added Demand Was Met: 1995-2004

Source: EIA, IEA

United States European Union 15

Distillate and Gasoline Relationships --Distillate and Gasoline Relationships --Temporary or Fundamental Change?Temporary or Fundamental Change?

• Unusual distillate and gasoline prices in 2005 – Not just a U.S. issue

• Explore Europe/US light product supply/demand balance to illustrate market dynamics– Europe’s product imbalance– U.S. product imbalance– How they fit together

• Current distillate market and supply response

In Response to Price, U.S. Distillate In Response to Price, U.S. Distillate Yields Have Been Unusually HighYields Have Been Unusually High

20%

21%

22%

23%

24%

25%

26%

27%

28%

J F M A M J J A S O N D

2005

Average (01-04)

Weekly U.S. Distillate Yields

Source: EIA Weekly Data

PADD 3 Estimated Lost Crude Refinery PADD 3 Estimated Lost Crude Refinery Input Volumes from Katrina and RitaInput Volumes from Katrina and Rita

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

AugWk5

SepWk1

SepWk2

SepWk3

SepWk4

OctWk1

OctWk2

OctWk3

OctWk4

NovWk1

NovWk2

NovWk3

NovWk4

DecWk1

Th

ou

san

d B

arre

ls P

er D

ay

U.S. Weekly Distillate ProductionU.S. Weekly Distillate Production

9/30/05

2000

2500

3000

3500

4000

4500

5000

1/7/05 3/7/05 5/7/05 7/7/05 9/7/05 11/7/05

Th

ou

sa

nd

Ba

rre

ls P

er

Da

y

2005

2004

Estimate

180

190

200

210

220

230

240

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mil

lio

n B

arre

ls

NOTE: Colored Band is Normal Stock Range

U.S. Total Gasoline Inventories End of Month

Gasoline Inventory: Fall 2004 and 2005 Are Gasoline Inventory: Fall 2004 and 2005 Are Quite DifferentQuite Different

Source: EIA

Estimates

80

90

100

110

120

130

140

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mil

lio

n B

arre

ls

NOTE: Colored Band is Normal Stock Range

U.S. Distillate Inventories End of Month

Ivan

Distillate Stocks Impacts: Ivan- 2004, High Distillate Stocks Impacts: Ivan- 2004, High Distillate Margins- 2005, Katrina & RitaDistillate Margins- 2005, Katrina & Rita

Source: EIA

Estimates

Pre Katrina: 2005 Distillate Not Flowing In or Pre Katrina: 2005 Distillate Not Flowing In or Out of U.S. in Unusual AmountsOut of U.S. in Unusual Amounts

-300

-200

-100

0

100

200

300

400

50019

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Th

ou

san

d B

arre

ls P

er D

ay

Imports

Exports

Net Imports

U.S. Distillate Imports, Exports Jan-Jul

While All Fuel Prices are High, Natural While All Fuel Prices are High, Natural Gas Gains Favor Fuel SwitchingGas Gains Favor Fuel Switching

-4

-2

0

2

4

6

8

10

8/1/

2005

8/8/

2005

8/15

/200

5

8/22

/200

5

8/29

/200

5

9/5/

2005

9/12

/200

5

9/19

/200

5

9/26

/200

5

10/3

/200

5

$/M

MB

tu

New York Price Differences

NY Natural Gas - NYH Residual Fuel

NY Natural Gas - No.2 Fuel Oil

Notes: Transco Z6 Spot Natural Gas, NY Harbor No. 2 and Resid (.31-1.0% S)

Source: Reuters

U.S. Distillate Market Leading Up to U.S. Distillate Market Leading Up to WinterWinter

• In 2004, excess gasoline supply developed, while the distillate market tightened

• The two products returned to similar balances by mid Summer 2005– High distillate prices in 2005 provided incentive to

increase distillate yields to winter levels, and resulting increased production caused inventories to build

– High availability of gasoline imports kept gasoline inventories high, despite strong demand and high distillate yield

• But the Hurricanes Katrina and Rita have caused major gasoline and distillate supply problems

Winter: Low Stocks Likely; High Winter: Low Stocks Likely; High Prices; Considerable UncertaintyPrices; Considerable Uncertainty

• Low distillate stocks – Reduced refinery distillate production from hurricanes– Diesel & jet supply affected more than heating oil– But heating oil supply and prices affected by other

distillates

• Uncertainties in distillate supply and demand– Timing of refinery restarts uncertain– Challenge to increase diesel fuel imports in competitive

Atlantic Basin – Potential for fuel switching distillate demand increase