Freezing weather along the Atlantic Coast has disrupted refinery operations threatening supplies of refined products – in particular distillates – in an already tightly balanced market. The resultant spike in heating oil prices has encouraged European traders to ship cargoes to New York – a reversal of flow patterns seen in recent years. Today we look at northeast distillate fundamentals and explain why European imports are headed across the pond.
The balance between supply and demand for distillates – mostly ultra-low sulfur diesel (ULSD) for road use and heating oil for residential and commercial heating - is traditionally tight in the northeast. We first described the challenges of distillate supply in this market in the context of growing refinery closures back in 2012 (see Beginning To See The Light). Since then, access to cheaper crude transported from North Dakota and (to a lesser degree) from Canada, has rejuvenated the region’s refining industry. Distillate supply is still problematic however and – as we shall see- supply interruptions like those caused by freezing cold weather – can prompt unusual trade patterns. According to data from the Energy Information Administration (EIA) the 9 operating refineries in Petroleum Administration District for Defense (PADD) 1 – representing the northeast and Atlantic Seaboard from Maine to Florida - have 1.3 MMb/d of crude processing capacity and produce about 350 Mb/d of distillates. Distillate demand in the region averages more than 3 times that local refinery output at 1.2 MMb/d with the largest consumption being on-road diesel (60%) and heating oil (25%).
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During the winter months heating oil demand can spike as high as 1.7 MMb/d (the average last January (2014) when Polar Vortex temperatures hit). Additional distillate supplies for PADD 1 come from other refining regions and imports. Most are transported from the Gulf Coast refining region – that supplies an average 750 Mb/d by pipeline and 100 Mb/d by barge. Pipeline transport costs are low but the main Colonial line is generally full and does not have capacity to increase supplies to meet seasonal shortages. Barge shipments from the Gulf Coast are very expensive because they have to be made using Jones Act vessels that cost upwards of 15 cents/Gal due to regulations governing movements between U.S. ports and such vessels are anyway in short supply (see The Sea and Mr. Jones). As a result increased imports generally balance supplies into the northeast market when seasonal distillate demand spikes. Imports accounted for an average of 161 Mb/d in the year to November 2014 with 75 % coming from Canada and the rest in smaller amounts from various countries including Latin America and Russia. Up until 2011 about 50 Mb/d was supplied from the U.S. Virgin Islands by the HOVENSA refinery in St. Croix that is now closed down awaiting redevelopment (see Prospects for a Tropical Refinery Restart). Because of the tight balance between supply and demand and because of the seasonal nature of heating oil consumption, the northeast has built strategic reserves in case of emergency. They have a Federal Northeast Home Heating Oil Reserve set up in 2000 that we described recently (see Save It For A Rainy Day), which now holds 1 MMBbl at two sites in Connecticut and Massachusetts.