Diesel: The Fuel Your Portfolio Shouldn’t Ignore…

by David Fessler, Investment U Senior Analyst
Wednesday, September 7, 2011

It’s no secret that the U.S. is the world’s largest user of crude oil. In 2010, we inhaled about 19,148,000 barrels every day according to the Energy Information Administration (EIA).

All of Europe as a whole was the second-largest user, gobbling up 16,434,296 barrels daily. China came in at third, using 7,263,328 barrels. None of this should come as a surprise, since China’s growth in auto sales has a direct correlation to its demand for oil. That demand is increasing at about one million barrels per year. India’s in a similar car-oil growth pattern.

What might surprise you is that while the United States is the largest oil importer, it has been exporting record amounts of diesel fuel.

Perhaps even more surprisingly, those exports have been steadily increasing for nearly a decade. Its exports of diesel fuel (also known as distillate fuel) hit a record 656,000 barrels per day (bpd) in 2010.

Just take a look at the chart below, courtesy of the Energy Information Administration.

U.S. Distillate Export Growth

The trend seems destined to continue this year as well. For the first six months of 2011 (the most recent that data is available for), diesel exports are averaging 730,000 bbl/d. That’s an increase of 32 percent over the same period in 2010.

Why the United States is Exporting Diesel

The answer lies in more about fuel usage patterns in other parts of the world.

From 2000 through 2008, according to figures compiled by the International Energy Agency (IEA), global consumption of diesel fuel has increased by 23 percent. Global consumption of gasoline has only increased by seven percent over the same period.

By way of example, this summer my family and I vacationed in Nicaragua. Our rental car, and nearly every vehicle on the road, ran on diesel. It was $1.00 a gallon cheaper than gasoline. The same is true for many other developing countries.

Here in the United States the situation is quite different. We use far more gasoline than diesel. Consequently, refineries have been historically focused towards producing gasoline.

But as global consumption of diesel has continued to increase, domestic diesel prices strengthened relative to gasoline prices. Refiners saw an opportunity to increase profits by shifting production away from gasoline and towards diesel.

The recession saw a drop in demand for both gasoline and diesel here, one that’s ongoing. But with global diesel demand still on the rise, refiners here seized the opportunity, and shifted production.

Exporting diesel in support of increased global demand took care of what would have been an excess supply. The effect has kept diesel prices here above those of gasoline for some time now.

Where  All the Diesel Exports Are Going

Nearly half of the diesel America exports heads directly south. Central and South American countries purchased 311,000 bdp (47 percent) of America’s diesel exports in 2010. Those same countries accounted for over half of the increase in exports for the last 10 years.

Lack of refining capacity and the relatively close proximity to Gulf of Mexico terminals make Central and South America great customers for U.S. diesel exports.

U.S. distillate exports to Europe are on the rise, as well, with the Netherlands buying up 115,000 bbl/d last year. Most of that likely ended up in other European countries, as the Netherlands is a key European import hub for petroleum products.

Europe too is shifting more towards diesel, and it has the additional requirement that its diesel be low-sulfur content. Most refiners outside of the United States can’t produce it, adding another feather in American refiners’ caps.

The Three Largest U.S. Diesel Refiners

ExxonMobil Corporation (NYSE: XOM), Chevron Corporation (NYSE: CVX) and ConocoPhillips (NYSE: COP) are the three largest U.S. refiners, and they produce most of the diesel fuel sold both here and overseas. All are capable of producing the low-sulfur variety European countries require.

Taken together, Mexico, Central and South America, and the Netherlands inhale 83 percent of the diesel exported by the United States. Those markets should continue to grow, and represent excellent opportunities for any of the refineries listed above.

Remember this: Global demand is on the increase, regardless of what’s happening here in the United States. This will favor continued strength in U.S. refiners who can shift production to take advantage of the increasing global demand for distillates, particularly low-sulfur diesel fuel.

Good investing,

David Fessler