US becoming increasingly reliant on oil product imports

US becoming increasingly reliant on oil product imports

New York (Platts)--10Jul2006

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 totaled 20.858 million b/d,
down 374,000 b/d 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 b/d 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
totaled 14.952 million b/d during the four weeks ending June 30, a decline of
114,000 b/d 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
million b/d to a high of 3.667 million b/d in October 2005, following the
extensive refinery outages in the US Gulf Coast in the wake of Hurricanes
Katrina and Rita.

Since that time, imports have fallen below 2 million b/d only one time,
even as refinery utilization has risen back to over 93%. Prior to the
hurricanes, imports averaged more than 2 million b/d 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.

--Dave Marino, david_marino@platts.com

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