Refiners Tilt to Diesel Over Gasoline
More Output Sought
As High Demand Makes
Fuel More Profitable
By ANA CAMPOY
May 16, 2008; Page B3
U.S. refiners by now would be moving full-speed to ramp up gasoline production in advance of the summer driving season, but instead they are trying to maximize output of more-profitable diesel fuel.
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Associated Press
Randal Line fills a tank on his truck with diesel fuel at the Pilot Travel Center in Harrisburg, Pa.
The global hunger for diesel, coupled with tight refining capacity, has made diesel one of the few bright spots in the refining business, catapulting prices higher than a parallel rise in gasoline.
Diesel prices were up an additional 18.2 cents last week to a record $4.33 a gallon, a 56% increase over the price at this time last year. Gasoline is climbing, too, but less dramatically. Gas prices rose 10.9 cents to $3.72 a regular gallon last week, 20% higher than a year ago.
Diesel's higher price means the fuel is more lucrative for refiners at a time when gasoline profits are shrinking. "The economics are telling us not to max out the amount of gasoline; they're telling us to max out the amount of diesel," said Lynn Westfall, chief economist at Tesoro Corp.
While U.S. consumers are cutting back on energy consumption because of high fuel prices and a slowing economy, demand is growing briskly in the developing world, where diesel is often favored over gasoline. Unlike gasoline, which is used mainly in automobiles, diesel also fuels tractors, trucks and electricity generators.
Although government data showed a build-up last week in stocks of distillates, which are mostly diesel, supplies remain well below last year's levels.
The weakening demand for gasoline in the U.S. has made it difficult for refiners to raise prices enough to compensate for crude-oil prices that have rocketed to $125 this year. Many refiners saw their earnings slide or reported losses in the first quarter.
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Gasoline is the primary fuel consumed in the U.S., and it dominates refinery output. In 2007, gasoline accounted for about 35% of the refined petroleum products made in this country, with diesel making up 24% of the total.
As diesel's price increase has outstripped that of gasoline, U.S. refiners have been easing the throttle on gasoline production, cutting refinery operating rates to 86.6% from 89.5% a year ago, according to the latest weekly government estimates.
Recently, weekly gasoline output dropped an average 2.2% from the same period last year, and it is below 2006 and 2005 levels. Meanwhile, weekly distillate production, which is mostly diesel, grew an average 3.2% from last year and surpassed levels from the previous two years.
The refiners' new emphasis on diesel is unlikely to have a big effect on the price of gasoline at the pump. Amid weak demand and supplies above last year's levels, gasoline prices are mostly taking their cue from the price of oil itself.
After Valero Energy Corp. reported lower first-quarter profits last month, company officials assured investors they are trying to increase diesel production. Chief Operating Officer Rich Marcogliese told analysts in a conference call that he believed the refiner could find about 200,000 more barrels a day of distillate that "we can move out of the gasoline pool, and we're trying to capture every bit of that." In April, the company increased distillate yields by more than 50,000 barrels a day to a total of 935,000 barrels a day.
But refiners are limited in how much they can do in the short term. Despite the high premiums for diesel, U.S. refiners have been able to eke out only about 3% to 4% more diesel than they produced in 2004, says Thomas O'Connor, senior manager at ICF International, a consulting-services company.
To significantly boost output, refiners must retool production facilities with expensive equipment designed to chemically treat oil to squeeze extra diesel gallons. While some refiners are laying plans to expand their diesel capacity, it will take years to bring the changes online, says Olivier Abadie, a refining expert at Cambridge Energy Research Associates.
Until then, one way refiners are ramping up production in the short-term is to process the kind of oil that will deliver the biggest diesel yield a barrel: a medium-grade, low-sulfur crude. The low sulfur content means refiners can clean larger amounts of fuel faster to meet federal clean-fuel specifications.
Growing demand has made that medium-grade fuel harder to come by, and more expensive. Prices of one such crude, Nigerian Forcados, have surpassed the market West Texas Intermediate benchmark in the spot market for most of this year.
As refiners compete to secure crude-oil supplies to make more diesel, they are adding to the pressure on rising oil prices. Crude for June delivery closed at $124.12 a barrel, close to its all-time high of $125.96 last week.
"The diesel market is suffering a chronic shortage in production capacity that has put the petroleum complex under enormous strains," says Francisco Blanch, head of global commodity research at Merrill Lynch. "In particular, diesel has contributed to push up WTI crude-oil prices in recent months."
Write to Ana Campoy at ana.campoy@dowjones.com1
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