Distillate fuels feeling French strike

French Fried
Alright, I admit it was kind of fun snickering about the French Strikes. You know, like joking about the French work ethic (assuming they had one). You know the routine. The French have been striking and staging mass protests that have turned violent as the government moves to take away French entitlements they cannot pay for. The French are to vote on raising the retirement age from 60 to 62 (Sidérer!!!). With an aging French population and years of the government giving the country free goodies, the government is going to have to make much needed reforms or face an inevitable economic collapse.

The strikes have shut down 12 oil refineries in France leading to shortages of diesel and gasoline. The International Oil Daily Reported that, "lost French production is driving dramatic price gains in diesel and jet fuel in Europe, France's 12 oil refineries - all but one of which has been shut down by national strikes - produce around 60,000 tons of diesel and 30,000 tons of jet a day. But even with refineries at full production, the country is a net importer of both products. Minimal domestic production means France is sucking in products from neighboring Germany, Italy and even Spain, as well as drawing from strategic stockpiles."

Of course this was entertaining to watch from afar until you realize it is starting to cost us all a bit of money! (Effroyable!) In fact a drawdown in U.S. distillate supply may be the first sign that this strike in France is starting to take its toll on our abundant supply. Yesterday we saw distillate fuel fall by a more than expected 2.2 million barrels last week and it could be because in France last week they had to import a record amount of supply of refined product. These record imports are one of the reasons that US supply of distillate fell.

Why am I focusing on distillate? Well you see in France that is the fuel of choice for automobiles. In fact over 70% of all French vehicles run on diesel. Diesel shortages have been more pronounced and the U.S., an exporter of diesel, will play a part in filling the void. Many people do not realize that the U.S. is an exporter of distillate which includes diesel. The Energy Information Agency reported that in 2008 the United States switched from being a net importer to a net exporter of middle distillates, as surging world demand produced strong price incentives for U.S. refiners to export. Most U.S. exports went to markets in Europe and Latin America. U.S. refinery middle distillate yields during summer 2008 jumped 3.4 percentage points over summer 2007 from changes to refinery operations alone, allowing refiners to produce more distillate for export while avoiding surplus production of gasoline.

Even though distillate margins have receded from 2008 levels, export opportunities remain attractive, and distillate export volumes have stayed high. The EIA also says that longer-term factors also suggest a growing need to produce more middle distillate fuels relative to gasoline. They say that the consumption of petroleum-based gasoline is likely to decline for at least the next five years because of increasing light-duty vehicle efficiency standards and the growing use of renewable motor fuels and blending components as mandated by the Energy Independence and Security Act of 2007.

From 2010 through 2015, EIA's 2010 Annual Energy Outlook shows U.S. gasoline consumption (which includes volumes of ethanol blended into the fuel) to be relatively flat, which implies a reduced need for petroleum-based gasoline once the increasing volumes of ethanol that suppliers will blend into gasoline are taken into account. In contrast, EIA's Annual Energy Outlook 2010 projects that U.S. middle distillate consumption will continue to grow in the longer term, averaging 1.6 percent per year growth from 2010 to 2015. The forecast has heavy-duty vehicles experiencing less improvement in vehicle efficiency than anticipated in the light duty fleet, and little non-petroleum fuel penetrating distillate fuel markets.

So long term the market for distillate is going to gain more prominence in the marketplace and become a more important indicator of economic growth. Short term, if the strikes in France continue it could force the EIA to revise upward their winter fuels outlook.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


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