REFINERS BLAME DISTRIBUTION FOR DIESEL FUEL TIGHTNESS

REFINERS BLAME DISTRIBUTION FOR DIESEL FUEL TIGHTNESS

Although U.S. refiners may have been slow to meet the Oct. 1 deadline for low- sulfur diesel fuel, spot shortages and higher prices in the Midwest are due to distribution, not production, industry sources said.

"There's more than enough capacity to meet demand," said Urvan Sternfels, president of the National Petroleum Refiners Association, Washington."The problem is a whole range of difficulties, and the fact that the new rules were promulgated without a lot of thought to distribution."

Some refiners had temporary production problems just as the Oct. 1 deadline neared, he said, while outages along the key Explorer Pipeline that runs between the Gulf Coast and Chicago also created shortages.

But the Environmental Protection Agency made a mistake in setting the deadline in October, Mr. Sternfels said.

"My bet is that if the EPA could revisit this, they would not have set the deadline for Oct. 1," he said.

''In the fall, demand for heating oil goes up dramatically, and so does fuel demand from farmers who are harvesting. Everyone is looking for middle distillates."

Wholesale prices for low-sulfur diesel continued significantly higher in the Midwest than in the Northeast Thursday.

In Chicago, Detroit and Indianapolis, reseller terminal prices ranged between 73 cents and 77 cents a gallon, with a 12- to 15-cent premium over high-sulfur fuel.

At Eastern terminals, prices ranged between 60 and 68 cents a gallon for low-sulfur fuel, with premiums between 1 and 5 cents above high-sulfur fuel, Journal of Commerce price postings show.

About 46 percent of U.S. distillate fuel oil demand is used as an on-road motor fuel, with 32 percent used off-road and 22 percent for home heating.

Since April, refiners have been working hard to make low-sulfur diesel, Mr. Sternfels said, raising production from 300,000 barrels a day to 1.7 million b/d in October, or about half of distillate production totaling 3.4 million b/ d.

Earlier this week, shortages at some distribution terminals prompted some independent marketers to claim that refiners were allocating product for their own retail outlets, forcing them to shop elsewhere, and at higher prices.

In one example, Marathon Oil Co. of Houston shut its terminals in Indiana, reserving low-sulfur supplies for its own branded retail outlets, according to one Illinois truck stop operator.

"We've had some spot shortages like everybody else, but most of that has cleared up," said William Ryder, a Marathon spokesman. "We're now selling oil to one and all."

Raoul LeBlanc, a fuel oil specialist at Energy Security Analysis Inc., said fuel shortages stemmed from distribution problems and the fact that some buyers were forced to switch suppliers to those trading low-sulfur fuel.

"On the Gulf Coast, where most diesel fuel is refined, they had adequate production, and the Northeast had adequate stocks," Mr. LeBlanc said.

"The Midwest had pipeline problems that drove prices up. But now we are

finding that the premium for low-sulfur has gone up in the Northeast and Gulf Coast, and come down some in the Midwest.

"There's continued strong demand, but production is still strong and stocks are coming down. That means rising prices, but I don't think there will be a problem for long. Short term, prices will head down in all areas, except California. They have problems of their own, and we don't know how that will work out." (See Story, Page 1A).

"Production of low-sulfur diesel has gone up in all areas of the United States except the Rocky Mountains, and that's insignificant," said Joseph Loftus, a vice president at Bonner & Moore Marketing Consultants, Houston.

"The refiners are trying to get it out. They may have been a little slow to make it earlier in the year, but now that prices are high, there's a big incentive to make it."

He said that at the start of 1993, about 19 percent of domestic refining capacity did not have the ability to make low-sulfur diesel.

Still, there is enough capacity to make 2.8 million barrels of low-sulfur fuel each day, or much more than is needed for on-road use. Another 700,000 b/ d would be added to capacity over the next two years, he said.

All of that capacity eventually will be needed, said Ted Eck, chief economist at Amoco Corp., Chicago.

"There's not a world abundance of diesel fuel. Whether it's low-sulfur or high-sulfur, the middle of the barrel is in tight supply. The United States is even exporting some of it, and demand has increased substantially.

"If we get a cold winter, that will be a further complication," he said. ''Refining capacity for middle distillates is pretty tight, and U.S. refiners are operating at 92 percent of capacity."