Tighten Up - PADD 1 Distillate Shortage Threatens Winter Price Spikes

Refined product supply in Petroleum Administration for Defense District (PADD) 1, which comprises Atlantic Coast states from New England to Florida, has been in trouble all year. Maintenance issues beset refineries during the first quarter, and then in June, the region's largest refinery, a 355-Mb/d plant owned by Philadelphia Energy Solutions (PES), was shuttered after a fire. The loss of the PES output would've been manageable if imports had taken up the slack. But although gasoline imports increased, distillate shipments have actually been lower than normal since June. As a result, the PADD 1 distillate market has been drawing an average 163 Mb/d from inventory since mid-August, according to weekly Energy Information Administration (EIA) reports, leaving stocks in the region at a 10-year low. That storage deficit versus previous years will increase when the weather turns colder and heating oil demand kicks into high gear. With stocks at historical lows and market prices not attracting new supplies, the shortage may well foreshadow price spikes this winter. A potential strike by unionized workers at the Phillips 66 Bayway refinery in northern New Jersey could make matters worse. Today, we look at what's behind the PADD 1 distillate shortfall.

This blog is based on research from Morningstar Commodities and Energy. Click here for a copy.

The ebbs and flows of crude feedstocks and refined products for East Coast demand centers is a running topic in the RBN blogosphere; it seems that just as a trendline appears in the region, something disruptive changes the dynamics. We've tracked the plight of refiners in PADD 1 in recent years, including a comprehensive outlook in Back to Red on refining in the region in October 2016. In June, we described in Another One Bites the Dust how the PES closure would mostly affect the Mid-Atlantic refining district fed by Philadelphia refineries. At that time, it looked as though an increase in refined product imports would resolve any product shortage issues in the short term, with the potential partial reversal of Buckeye Partners’ Laurel Pipeline offering prospects for increased product shipments from the Midwest to help make up for the loss of PES output in the longer term.

We begin today’s analysis with a recap of the big picture for PADD 1 refined product supply, specifically of gasoline and distillate. Distillate includes diesel used for road transport and heating oil used primarily for home heating. PADD 1 is net short of refined products because the region’s refining capacity, which totaled 1.2 MMb/d before the PES closure, only produced about 800 Mb/d of gasoline and distillate, according to 2018 annual average data from the EIA. That volume met just 20% of the regional demand for 2.9 MMb/d of gasoline and 1.3 MMb/d of distillate in 2018. The shortfall was primarily met with supplies shipped into PADD 1 by pipeline, barge and tanker from the Gulf Coast PADD 3 region, including an average 1.8 MMb/d of gasoline and 800 Mb/d of distillate in 2018 — the majority of that moving on the 2.7-MMb/d Colonial Pipeline system that runs up the East Coast from Houston to Linden, NJ. The balance of PADD 1 demand last year was met by imports, which averaged 600 Mb/d of gasoline and 150 Mb/d of distillate during 2018. The difference this year is that refinery crude throughput averaged only 989 Mb/d between January and June, and just 834 Mb/d since the PES fire, leaving the region increasingly reliant on outside supplies.

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