The amount of crude oil being produced in the United States is at record highs. In the past 10 years, the United States has more than doubled its oil production at nearly 12 million barrels per day.
To understand the state of the energy market and how CHS is responding, energy experts Jason Schwantz and Mary Joneson spoke at the CHS Annual Meeting, held in December 2018 in Minneapolis, Minn.
Increasing Crude Production
“Forecasts only show crude production numbers increasing and U.S. shale production leads the growth,” says Schwantz, senior vice president of CHS Refined Fuels. “The U.S. has seen a 15 percent increase in production year-over-year.”
Investments in the two CHS refineries in McPherson, Kansas and Laurel, Montana allow CHS to capitalize on the influx of crude. “Our 2018 turnaround at Laurel focused on improving our ability to process heavy crude coming out of Canada and increased our diesel yields,” says Joneson, vice president of commercial supply for CHS. “The upcoming 2019 turnaround at McPherson is aimed at the same goals.”
Due to a number of factors, like a high refinery turnaround season, 2018 saw wide crude differentials depending on location. “When we look at three crude benchmarks (Bakken, Western Canadian and West Texas Intermediate), there was sometimes as much as $55 differential per barrel,” says Joneson. “At CHS, we monitor these differentials closely so we can take advantage of lower Canadian crude prices.”
Exports and International Relations
With increased production from U.S. refineries comes increased exports, with more than 2 million bpd being exported every day – a 92 percent increase from 2017. “This crude mostly makes it way to Asian countries like China, South Korea and Taiwan,” says Schwantz.
Diesel exports, which equaled about 1.3 million bpd – roughly the same amount as the Midwest consumes – mostly went to Mexico and Latin America. “Exports to Mexico continue to be key to U.S. refining,” says Joneson, who said that 25 percent of diesel exports and 60 percent of gasoline exports go to Mexico.
But the market can change quickly, and Schwantz spoke to several factors that cause unpredictability, such as the trade war with China and the updated NAFTA treaty. “Policies change quickly and they affect the market every day,” he says. Schwantz also talked about how a new regulation starting in 2020 from the International Maritime Organization, which requires ships to use fuel with a less than .5 percent maximum sulfur content, will change diesel consumption. “The global shipping industry consumes roughly 3.5 million barrels per day of fuel, and this regulation will change the type of diesel these vessels can consume.”
Domestic Commercial Supply Trends
Diesel inventories are on the lower end of five-year averages and overall demand is up 6 percent over 2017. “Diesel demand is highly correlated to the recent economic growth,” says Joneson.
Although people continue to drive more miles on the road, gasoline demand is flat due to more efficient vehicles and alternative fuels. “A record number of miles were driven in 2018, but fuel efficiencies continue to improve every year,” says Joneson.
Joneson says CHS refineries will continue to make investments that prioritize diesel production. “We produce more diesel per barrel than many other refineries because we’re focused on meeting the energy needs of our owners and rural America.”