Global trends for distillate fuels, which include diesel and heating oil, are quickly increasing the demand for the fuel and triggering major changes in the United States’ role in the world distillate market.

Distillate fuels, which count as the second largest petroleum product consumed in the U.S., are used for everything from fuel for trucks and trains to residential heating and even a small amount of power generation.

The U.S. was a net importer of small volumes of distillate for many years, with imports primarily originating from Canada and the Virgin Islands, explains the Energy Information Administration. The U.S. imports would usually occur during the winter heating season, "when additional supplies from areas like Eastern and Western Europe and Latin America would occasionally surge," said the EIA.

"This trade pattern changed significantly in the spring, summer, and fall of 2008 as wholesale prices for distillate soared above those for gasoline," said the EIA. "Distillate prices have rarely been higher than gasoline during the summer months but, the summer of 2008 saw an unprecedented and sustained premium for distillate."

There were a number of factors behind the change. Price controls in Argentina limited the production and export of natural gas, while a severe drought in Chile reduced its hydroelectric generation. Imported distillate fuels to produce electricity "was a convenient short-term substitute for these shortages."

The demand hike triggered a surge in prices. However, price controls and fuel subsidies in a number of countries that consume diesel, including China and India, shielded their domestic consumers from higher prices. As a result, climbing prices failed to discourage consumption.

The impact in the U.S. was spiking costs for diesel fuel and heating oil, with those prices at a premium to gasoline from August 2007 through February with the exception of September 2008 when hurricanes triggered gasoline shortages.
U.S. refiners reacted by shifting their production yield towards distillate fuel production in 2008, "nearly reaching an unprecedented 30 percent by the end of 2008," explains the EIA.

Distillate yields were nearly 3 percent higher than usual from June through August, resulting in 380,000 bpd of additional off-take. The production volume accounted for more than 10 percent of domestic demand during that timeframe.

"This extra production was occurring despite the fact that domestic demand had fallen over 9 percent compared to the previous year," said EIA. "Refiners were responding to a global, not a domestic, opportunity, continuing a dynamic that began in mid-2007."

As a result, the U.S. became a distillate exporter, with supply primarily heading towards South America and Western Europe.

"Net exports peaked in August 2008 at about 740 thousand barrels per day, before falling to some extent later in the year in the face of the coming winter heating season and a significant decline in wholesale prices due to the global economic downturn," said the EIA.

For much of this year, the distillate market shifted back to its previous discount position with gasoline amid the global recession, but the U.S. continues to export distillate.

Net exports through July have averaged about 350,000 bpd compared to almost 275,000 bpd for the same period in 2008.

"The results of these market changes are not easy to predict," said EIA, noting that many of the catalysts that sparked increased U.S. exports in 2007 and 2008 are not repeatable events.

Led by developing nations, global distillate demand is projected to grow much faster than gasoline in the coming years according to the EIA, International Energy Agency and several others.

"The United States may therefore remain a distillate exporter for some time," said the EIA.