The US Atlantic coast distillate market grappled with higher inventories and flat demand throughout most of 2024, dynamics that are likely to continue in the coming year.
In the US Gulf coast, the main supplier of distillates to the Atlantic coast, refinery production has outpaced US domestic distillate demand, saturating the region with product shipped via the Colonial and Plantation pipelines.
The US Gulf coast supplies roughly 70pc of all diesel consumed in the US Atlantic coast, with the majority shipped via pipeline. The four-week average for production of ultra-low sulphur distillates — including diesel (ULSD) and heating oil (ULSH) — in the US Gulf coast for the week ended 13 December was 7pc higher than levels from a year earlier. But overall US diesel demand was down by 2.1pc year-over-year and down by 1.9pc on the US Atlantic coast.
In addition to soft demand, ultra-low sulphur distillate stocks in PADD 1B — which includes New York, New Jersey, Pennsylvania, Maryland and Delaware — in the week ended 13 December were nearly 36pc above levels a year earlier and 33pc higher than average levels recorded since the beginning of the Russia-Ukraine war in February 2022.
Even with demand flat and inventories oversupplied, US refineries have not cut production. Heightened export opportunities, primarily to Europe, have created active trade flows between US Gulf coast diesel refiners and overseas end-user markets. Total distillate exports loading from the US Gulf coast year-to-date 2024 are 10pc higher than in the same period in 2023, with a 1.12mn b/d export average in 2024, compared to 1.02mn b/d loading in 2023.
But not all of the additional supply is making it out of the Gulf coast. A 4.9pc increase in production in the Gulf coast means an extra 130,000 b/d of supply, while an increase of 10pc in diesel exports means an extra 100,000 b/d in outflows.
Fluctuations in vessel availability and refinery production often prevent all distillate output allocated for export from being shipped from the US Gulf coast. As a result, incremental overproduction of distillates is redirected to the US Atlantic coast, with one market participant describing the Colonial pipeline as a "dumping ground" for excess product.
Although economic growth in Europe remains flat, changes in the global supply chain following Russia's invasion of Ukraine are expected to sustain arbitrage opportunities for US producers to ship diesel to Europe. Shipping EN-590 gasoil — the European diesel fuel standard with a 10 ppm sulphur limit rather than the 15 ppm ULSD equivalent used in North America — from the US Gulf coast to Europe is easier than from the US Atlantic coast because of the US Gulf coast's larger refining capacity and export infrastructure, despite the US Atlantic coast's closer proximity to Europe. Although EN-590 and ULSD have similar low-sulfur requirements, EN-590 requires specific blending to meet European standards, a process better supported by US Gulf coast refineries.
It does not appear that significant relief is on the horizon in the form of increased domestic demand. Diesel demand traditionally closely traces gross domestic product (GDP). But that correlation has been decoupling in recent years as the US economy has increasingly relied on non-manufacturing services to provide economic growth. Year-over-year GDP in the US grew by 2.8pc at the end of the third quarter of 2024, while diesel demand fell by 2.1pc during the same period, according to US Bureau of Economic Analysis data.
While some economists are projecting US GDP to grow around 2.5pc in 2025, this is unlikely to lead to a spike in diesel demand. Continued demographic shifts and population migrations away from the US Northeast to the Sun Belt states also do not support increased demand forecasts.
With narrowing refining margins, dwindling demand and sustained higher production, market participants could expect to face challenging economic conditions in 2025.
