Release date: February 18, 2016 | Next release date: February 24, 2016
European distillate oversupply results in floating storage and shipping changes
Europe, like the U.S. East Coast, is experiencing a relatively warm winter. In addition to the resulting weak winter heating demand, high refinery runs in Europe and increased imports have kept distillate inventories in the Amsterdam, Rotterdam, and Antwerp (ARA) area far above normal. Higher inventories have pushed distillate futures prices in the ARA into a steep contango (meaning prices for delivery dates further in the future are higher than for near-month delivery). As a result, inventories are being held in floating storage and imported cargos are being diverted to longer voyages.
Distillate produced at ARA refineries is typically moved via barges on the Rhine River and a pipeline that runs near the river into western Germany and eastern France (Figure 1). Low water levels on the Rhine River, which disrupted barge shipments earlier in the season, contributed to high inventories in the ARA area in late 2015. Rhine River water levels have risen in recent months, allowing normal barge traffic to resume, but reduced heating oil demand kept ARA distillate inventory at elevated levels.
Increased European refinery runs are another factor contributing to high distillate inventories in the ARA region. As demand for gasoline in the United States and in West Africa increased last summer and fall, higher gasoline crack spreads led to increased European refinery runs. The increased refinery runs yielded distillate, along with the more profitable gasoline.
At the same time, new and traditional sources of distillate have expanded capacity to supply ultra-low sulfur distillate (ULSD) to Europe. In Russia, which is a longtime supplier of distillate to Europe, refineries have been upgraded to produce lower-sulfur distillate fuels that are widely used in Western Europe, and have increased exports to Europe. Elsewhere, several new refineries, including those in Saudi Arabia and India, which are geared toward maximizing ULSD output, have come online in the past few years, further adding to the supply of distillate.
These factors — reduced heating demand, increased European refining runs, and increased imports — have pushed independently held distillate inventory levels in the ARA to more than 26 million barrels in recent months, more than 7 million barrels higher than the five-year average (Figure 2).
The ARA is the delivery point for the Intercontinental Exchange (ICE) gasoil (distillate) futures contract. Consistently high distillate inventories in the ARA have pushed prices lower and ICE gasoil futures into a steep contango. The futures spread between the prompt month ICE gasoil contract and the contract for 12 months forward was $8.90 per barrel contango in January (Figure 3).
Trade press reports indicate that a lack of storage space and a large contango have pushed distillate supplies into floating storage and encouraged import cargoes to take longer shipping routes. When contango in the futures contracts become sufficiently large, market participants can lock in a profit by purchasing distillate supplies on the spot market, chartering a vessel, and selling a longer-dated futures contract. Trade press report that several vessels in European waters, such as off the coast of Gibraltar in southern Spain and outside of the ARA ports, have been booked specifically for distillate floating storage. Another tactic employed by market participants is to have inbound cargoes take longer voyages, which allows more time to find a buyer, or onshore storage space, and also provides a return from the higher priced later delivery date. According to the trade press, many cargoes from the Middle East and India have diverted around the Cape of Agulhas, at the southernmost point of Africa, on their way to Europe rather than passing through the Suez Canal in Egypt. The longer trip takes 30-40 days instead of the 15-20 day journey through the Suez Canal (Figure 4).
U.S. average regular gasoline retail price decreases, average diesel fuel below $2 per gallon, first since 2005
The U.S. average regular gasoline retail price fell four cents from the previous week to $1.72 per gallon on February 16, down 55 cents from the same time last year. The West Coast price decreased 10 cents to $2.22 per gallon. The Rocky Mountain price was down six cents to $1.69 per gallon. The East Coast price declined four cents to $1.76 per gallon, and the Gulf Coast price was down three cents to $1.53 per gallon. The Midwest price increased less than a penny, remaining virtually unchanged at $1.52 per gallon.
The U.S. average diesel fuel price fell three cents to $1.98 per gallon, 89 cents lower than the same time last year and the first time the price has fallen below $2.00 per gallon since February 2005.The Rocky Mountain price fell five cents to $1.87 per gallon, followed by the Gulf Coast price, which was down four cents to $1.86 per gallon. The West Coast also decreased four cents to $2.19 per gallon. The East Coast and Midwest prices each declined two cents to $2.07 per gallon, and $1.91 per gallon, respectively.
Propane inventories fall
U.S. propane stocks decreased by 4.3 million barrels last week to 70.5 million barrels as of February 12, 2016, 9.0 million barrels (14.6%) higher than a year ago. Gulf Coast inventories decreased by 3.4 million barrels and Midwest inventories decreased by 0.5 million barrels. East Coast inventories decreased by 0.4 million barrels, while Rocky Mountain/West Coast inventories dipped slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 4.3% of total propane inventories.
Residential heating oil prices increase slightly, propane prices unchanged
As of February 15, 2016, residential heating oil prices averaged $2.10 per gallon, 1 cent per gallon higher than last week and almost 94 cents per gallon lower than last year's price for the same week. The wholesale heating oil price this week averaged $1.13 per gallon, less than 1 cent per gallon higher than last week and 98 cents per gallon lower than a year ago.
Residential propane prices were virtually unchanged from last week, averaging $2.03 per gallon, 32 cents per gallon lower than one year ago. Wholesale propane prices averaged 47 cents per gallon, also essentially unchanged from last week and 25 cents per gallon lower than the price last year.
For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.
Retail prices (dollars per gallon)
| Retail prices | Change from last | ||
|---|---|---|---|
| 02/15/16 | Week | Year | |
| Gasoline | 1.724 | -0.035 | -0.550 |
| Diesel | 1.980 | -0.028 | -0.885 |
| Heating Oil | 2.103 | 0.011 | -0.935 |
| Propane | 2.033 | 0.001 | -0.323 |
Futures prices (dollars per gallon*)
| Futures prices | Change from last | ||
|---|---|---|---|
| 02/12/16 | Week | Year | |
| Crude oil | 29.44 | -1.45 | -23.34 |
| Gasoline | 1.043 | 0.050 | -0.583 |
| Heating oil | 1.069 | 0.010 | -0.902 |
| *Note: Crude oil price in dollars per barrel. | |||
Stocks (million barrels)
| Stocks | Change from last | ||
|---|---|---|---|
| 02/12/16 | Week | Year | |
| Crude oil | 504.1 | 2.1 | 78.5 |
| Gasoline | 258.7 | 3.0 | 15.6 |
| Distillate | 162.4 | 1.4 | 35.0 |
| Propane | 70.458 | -4.340 | 8.993 |