11-07-06

America's seemingly unquenchable thirst for petroleum products at any price is outpacing domestic refinery production, leaving the US more reliant than ever on foreign imports and more exposed to sharp price hikes as a result.
Total US product demand has run below year-ago levels during the first half of the year, according to weekly estimates from the Energy Information Administration. Over the four weeks ending June 30, demand totalled 20.858 mm bpd, down 374,000 bpd from the same period in 2005. That figure is misleading, however, as the major products -- finished gasoline, distillate and jet fuel -- averaged a combined 253,000 bpd above year-ago levels.

The steep demand loss occurred in the categories of residual fuel, propane and the volatile and nebulous "other oils," some of which are used as petrochemical feedstock.
A mild winter and consequent decline in natural gas prices was behind some of the decline in resid and propane, while an increase in demand for blendstocks such as toluene and refinery grade propylene for blending to meet more revised US gasoline specifications cut into petrochemical feedstock demand, as did steam cracker shutdowns.

In addition, the EIA in its monthly revisions had sharply raised June 2005 "other oils" demand, possibly causing the latest weekly report to underestimate other oils demand relative to year-ago levels.
Meanwhile, refinery production of finished gasoline, distillate and jet totalled 14.952 mm bpd during the four weeks ending June 30, a decline of 114,000 bpd from the four weeks ending July 1, 2005, according to EIA data. With demand rising faster than production, imports have been called upon to a greater extent in order to fill the gap, not just periodically but on a regular basis.

Total US product imports on a four-week moving average soared well over 3 mm bpd to a high of 3.667 mm bpd in October 2005, following the extensive refinery outages in the US Gulf Coast in the wake of Hurricanes Katrina and Rita. Since that time, importshave fallen below 2 mm bpd only one time, even as refinery utilization has risen back to over 93 %.
Prior to the hurricanes, imports averaged more than 2 mm bpd only five times in 2004, and 16 through the end of August 2005.

The percentage of product demand satisfied by imports rather than domestic production has moved steadily higher, from 6.36 % at the end of June 2001 to 8.79 % in June 2003 and 11.43 % at the end of June 2005. During the pre-hurricane period, it was rare to see imports accounting for more than 10 % of US demand, happening only during 28 weeks since the beginning of 2001.
Following the hurricanes, imports have accounted for as much as 20.21 % of demand during the week ending October 14, 2005. Since then imports have moderated, but have not returned to historical norms, only falling below the 10 % level during seven weeks.

The result of the increased thirst for imports has been a need for US petroleum product prices to remain high enough to attract cargoes from Europe and elsewhere. One measure of the relative strength of product prices is the NYMEX 3-2-1 crack spread. A high value in the spread would give refiners incentive to run their plants flat out.
The front-month spread, after soaring up to $ 28.76/barrel in the immediate aftermath of Hurricane Katrina only to drop to 1.74/barrel in mid-February, has risen back to hover around $ 17.00/barrel, some $ 6.00 above year-ago levels.

Should demand continue to outpace refinery production and wholesale prices remain at such a level to draw in imports, prices at the pump of $ 2.934/gal for gasoline and $ 2.898/gal for diesel fuel could remain just as high, if not higher, this summer.