Record-Low Distillates Stocks Leave East Coast Exposed


   
Miguel E. Andujar
DTN Refined Fuels Market Reporter

   DAVENPORT, FL (DTN) -- The U.S. East Coast fuel market is heading into a 
major test in the coming weeks after distillates inventories hit their lowest 
levels on record last week, leaving the region particularly vulnerable and with 
little cushion ahead to a major planned maintenance outage at Irving Oil's 
Saint John refinery.

   The Energy Information Administration's Weekly Petroleum Status Report 
released Wednesday (9/2) showed that PADD 1 distillates stockpiles fell 1.7 
million bbl, or 8%, to 19.3 million bbl during the week ended August 28, the 
lowest level on record since the agency began tracking weekly inventories in 
1990.

   Last week's drawdown leaves the region with a thin supply cushion just days 
before Irving Oil plans a 75-day turnaround at its 320,000-bpd Saint John 
refinery in New Brunswick, Canada. PADD 1 is especially vulnerable to 
disruptions in outside supply because the region holds just 5.1% of U.S. 
refining capacity.

   According to EIA data, East Coast operable crude distillation capacity was 
at 928,300 bpd as of January 1, compared with 18.2 million bpd nationwide. As a 
result, the region depends heavily on refined-product movements from the Gulf 
Coast, primarily through the Colonial Pipeline system, as well as tanker and 
barge shipments and foreign imports.

   This year, however, those replacement flows have weakened due to the global 
supply shortage driven by the Middle East conflict. PADD 3-to-PADD 1 distillate 
pipeline movements fell from 842,000 bpd in January to 615,000 bpd in June, EIA 
data showed. Colonial Pipeline's Line 2 carries distillates from the Houston, 
Texas, area to Greensboro, North Carolina, where barrels can continue north 
through Line 3 toward Linden, New Jersey.

   Supplies are expected to remain limited as U.S. Gulf Coast refiners have 
opted to export distillates to cover the global diesel shortage. PADD 3 
distillate exports increased from 1.09 million bpd in January to 1.48 million 
bpd. Over the same period, PADD 3-to-PADD 1 pipeline flows dropped from 842,000 
bpd to 639,000 bpd, leaving fewer Gulf Coast barrels to supply the East Coast 
region.

   Additionally, the economics for shipping ULSD from Houston to Linden have 
weakened sharply. DTN market data showed that the NYH ULSD average premium over 
Gulf Coast ULSD has gradually declined from 7.48cts gallon in May to 2.55cts in 
August. Those spreads were below Colonial Pipeline's 7.98cts gallon 
Houston-to-Linden tariff before product loss allowances, line-space costs and 
other expenses.

   The spread turned negative on several sessions in late August, including a 
4.75cts gallon ULSD Gulf Coast premium over the same product traded in the New 
York Harbor on August 21.

   Fuel buyers do not have many options as the product is scarce even in the 
imports market. According to federal data, the four-week average for PADD 1 
distillate imports fell from 200,000 bpd early on the year to 88,000 bpd during 
the four weeks ended August 21.

   Supply concerns are especially pronounced in New England, where distillate 
inventories have fallen to about 2.3 million bbl heading into the fall heating 
season. The Saint John refinery, one of the Northeast's largest external fuel 
suppliers, is scheduled to begin a 75-day turnaround September 8.

   Based on the refinery's capacity and typical distillate yields, Saint John 
could account for an estimated 3% to 6% of total PADD 1 distillate supply, with 
its importance considerably greater in New England.

   The latest EIA data also showed distillate inventories in the Lower 
Atlantic, or PADD 1C, fell 17% on the week, indicating the draw was spread 
across more than one East Coast market.

   With limited refining capacity of its own, record-low inventories, fewer 
Gulf Coast barrels moving north, weaker import flows and upcoming maintenance 
at Saint John, PADD 1 is entering the fall increasingly dependent on an 
improvement in replacement supply before winter heating demand accelerates.

    




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