10 November 2011 19:42 [Source: ICIS news]
HOUSTON (ICIS)--Growing distillate demand and increasing exports have led to historically low supplies and incentive for US refiners to boost production rates, analysts and market traders said on Thursday.
“Refiners are going to be focusing more on distillate production because this is the season to be jolly and this is the season to also be in the distillate market,” analyst Phil Flynn with PFGBest said. “[But] the [distillate] inventory report on Wednesday was a kick in the gut. Showing how tight supplies were kind of blind-sided the market.”
The US Energy Information Administration (EIA) report on Wednesday showed US distillate inventories at 135.9m bbl for the week of 4 November, down by 15% compared with this week last year.
Flynn said refineries have difficulty tweaking operations to produce a greater percentage of distillate because of enrivonmental regulations. Therefore, to increase distillate inventories, refiners would have to increase refinery output.
For the week of 4 November, refinery utilisation fell to 82.6%, the lowest rate since spring 2011.
An increase in refinery utilisation would expand distillate supplies and ease prices. It would also increase gasoline supplies, adding product to a market that is already oversupplied and is seeing demand that is unusually low for late autumn.
Independent analyst Bob van der Valk said he expects gasoline prices to fall through the rest of 2011.
Distillate supply has been particularly strong in the US midwest. Oil production in North Dakota and in the Bakken oil field, which runs primarily through Oklahoma, has “sucked both the Nustar and Magellan pipelines dry,” two mid-continent pipelines, said a midwest trader.
In addition, demand in South America and China has picked up, Flynn said. The Chinese government is concerned that its domestic refiners will be unable to keep up with distillate demand for the winter, Flynn said. This has resulted in exports to China.
In South America, the emerging economies are booming and the harvest season is in full swing, increasing diesel demand, Flynn said.
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