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Ok, so the PADD 1 distillates situation is concerning, at least from the perspective of diesel and heating oil consumers there. But how did things go awry? After all, utilization rates for U.S. refineries ... suggests refiners are already doing all they can to maximize production. ...
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As for distillate imports, they’ve been sagging. Imported volumes to PADD 1 have been unimpressive for most of 2022 (red line in Figure 4), and in recent weeks they’ve been surfing the bottom of the 5-year range. A few factors could be at play here, but one that stands out to us is the pull of distillates to Europe — for some obvious reasons. For one, Russia had been a leading distillates supplier to Europe before Ukraine was invaded. Since then, flows of Russian diesel to the continent have been declining, and a European ban on imported Russian distillate is set to be implemented in February 2023. For another, with natural gas at a premium there, European power producers able to switch their plants from natural gas to diesel have been stockpiling distillate. All this also means that the occasional shipments of diesel that PADD 1 would typically receive from Europe in past years won’t be happening for the foreseeable future. In addition, the closure of the Come-by-Chance refinery in Eastern Canada in 2020 reduced the amount of diesel available for import from Canada, the primary supplier of imported diesel to the East Coast.
There’s another market influencer out there too, namely the impact of IMO 2020, the International Maritime Organization (IMO) mandate that most ocean-going ships powered by fuel oil (the most common bunker fuel) use products containing less than 0.5% sulfur by weight, a significant reduction from the previous specification of 3.5% sulfur by weight. Our understanding is IMO 2020 has resulted in about 700 Mb/d of global middle distillate supplies going to bunker, putting a further squeeze on supply. We should note that these additional barrels in the bunker pool aren’t always captured in official statistics (EIA, BP Stats review, etc.) because the final fuel is still sold as bunker, even though it contains more distillate than old-school ship fuel.
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