Engineering News

China, US Distillate Use Key to Crude Outlook
November 12, 2010

Demand for diesel fuel and heating oil is surging in the world's two biggest oil consumers as global inventories tighten.

The potential for lofty crude oil prices to mount a run toward $100 a barrel oil soon may depend on whether the market for so-called distillate fuel stays red hot.

In China, the world's second-biggest oil consumer after the U.S., spot shortages are occurring, as government-mandated closures of some coal-fired power plants and heavy industry is forcing a shift to distillate-burning generators.

Even as domestic refineries are processing crude at record high rates, China may become a net importer of distillate this month for the first time since 2008, to keep up with demand, analysts said.

China's demand surge could continue through February, effectively extending through winter in the Western Hemisphere, the International Energy Agency said Friday.

That projection comes as distillate fuel use and prices in the U.S., the world's biggest oil consumer, both climbed to their highest levels in more than two years in recent days. In Europe, tight heating oil stocks have been further crimped by last month's strike at French ports and refineries, which disrupted about 1 million barrels a day of fuel supplies.

"A colder-than-normal winter could send consumers scrambling to stock up home-heating tanks" in Europe, said Soozhana Choi, an analyst at Deutsche Bank. Meantime, inventories in the Northeast U.S., the world's largest heating oil market, have fallen below-year ago levels, but are 13% above the five-year average.

The surge in Chinese diesel demand stirs memories of 2004, when China burst onto the world oil scene with double-digit demand growth and propelled oil prices up 33% to above $40 a barrel for the first time. But there are key differences now. Spare oil output capacity held by the Organization of Petroleum Exporting Countries was razor thin back then, limiting the ability to respond to the demand surge, but now equates to 7% of global consumption.

Paul Ting, a consultant who specializes in China energy, said diesel use was rising sharply well before the recent government moves, noting that the level of demand cover provided diesel inventories has been halved in the past seven months.

"I do not see any easing of the diesel shortage conditions in the next few months," he said, adding this could help push crude oil prices above $100 a barrel in the first half of 2011, the drop below $85 a barrel on Friday notwithstanding. Triple-digit prices "could even be a first-quarter event if the diesel shortage intensifies," he said.

Expectations that China may move to raise interest rates to cap inflation triggered a steep selloff in equities and oil prices Friday. Ting said that barring "aggressive, constant" moves to raise rates, soaring distillate demand won't be slowed. Prices hit 25-month highs in recent days, with heating oil climbing more than 9% in eight successive gains through Wednesday.

U.S. demand for the versatile fuel, which powers trucks and locomotives and heat homes, hit 4.4 million barrels a day in the week ended Nov. 5, the federal Energy Information Administration said. But the outlook for continued strength is cloudy. The EIA estimates October distillate demand of 3.95 million barrels a day may be the monthly peak through 201l, if U.S. industrial output slows, as expected. Demand, which spurts in the winter, has never peaked in October in 65 years of government data. EIA analyst Tancred Lidderdale concedes the EIA's near-term growth forecast may be too low, on a possible under-estimation of recent industrial demand.

Demand for all of 2010 is projected to rise 3.3%, to 3.75 million barrels a day. In 2011, the EIA sees growth of just 0.8% in distillate use, to 3.78 million barrels a day.

Source: Dow Jones Newswires

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