Why - What's Throwing the Distillates Market Out of Whack?

The U.S. market for distillates has been crazy the past few months — especially in PADD 1 —  and given all that’s going on, it’s likely to stay that way for months to come. Inventories of ultra-low-sulfur diesel, heating oil and other distillates are at their lowest levels for this time of year since before the EIA started tracking them 40 years ago and diesel prices are in the stratosphere, all despite diesel crack spreads being in record-high territory — a strong incentive for refineries to churn out more distillate. In today’s RBN blog, we discuss the many factors affecting distillate supply, demand, inventories and prices and take a look ahead at where the market may be headed next.

It may be true (technically speaking) that everything that comes out of a refinery is a distillate — after all, the first step in refining (after removing salt from crude oil) is boiling the oil and running it through an atmospheric distillation unit to separate crude into diesel oil, kerosene, heavy naphtha, light naphtha and other distilled products. But when we talk about distillates, we’re really talking about “middle distillates” — so-named because they condensate in the middle of the fractional distillation tank. These would include diesel and heating oil and usually jet fuel/kerosene, while vacuum gasoil (VGO) is not included. (The terminology here can get a bit tricky as our friends outside the U.S. typically use the word “gasoil” to refer to middle distillates generally, while Americans often use the word “gasoil” to refer to VGO specifically.) Middle distillates typically account for 25% to 50% of a refinery’s yield, depending on, among other things, the facility’s equipment and the qualities of the crude slate used. Refiners can tweak their operations and their crude slates to ramp up (or down) how much middle distillate they produce.

The events that have roiled energy markets over the past couple of years — COVID, Russia’s invasion of Ukraine, the U.S. economic recovery and (more recently) talk of a recession, to name a few — have also altered the dynamics of the U.S. distillates market, nationally but especially in PADD 1 (East Coast). PADD 1 isn’t just a leading consumer of distillates — it’s pretty much tied with PADD 2 (Midwest) for the #1 spot — it’s also the region most dependent on others for its supply. As in other parts of the U.S., distillates are used to fuel trucks, tractors, trains and marine vessels of every size. They are also used in manufacturing, as a backup fuel at power plants that can be fired by either natural gas or diesel, and — importantly — for residential and commercial space heating, especially in the Northeast.