Diesel is THE Energy Cyclone, Not Coal, Natural Gas or Coal

Politicians and non-energy analysts wax lyrical about Gasoline, natural gas and oil. What is scary is the ignorance about the state of the distillate or diesel marketplace. It is dire and has seemingly passed by administrators from the US.’s Biden to much of Europe with policies with no mind to potential unintended consequences. US inventories are likely at the end of the heating season to be 40-year lows. America has been the swing producer for Europe and US refining capacity is maxed out. Russia still provides Europe with around 40% of its diesel.

U.S. distillates inventories are at a level 30% lower than normal for this time of the year. The US is the swing stop for Russia, what happens when Russian imports are banned, or American prices cause even more inflation or supply shortages.

Why are we in this situation with distillates?

This is not an easy question as there are many confluences. It has been argued that the section of the population is out of the mainstream media and politicians’ eyes for significance. Gasoline is the go-to as the majority of voter’s drive. Natural gas and coal are the next, particularly as we transition to renewable energy sources. In a nutshell these sources have both political and media mileage.

This gives you an idea where we are with the level of strategy and gameplay in not only US energy policy but Europe’s also. Diesel became an evil energy; the peak came with the VW settlements for false emission levels. For the masses that was it, especially those that live in major cities, the bulk of America and the key voting blocks. The scary bit is this is what energy policy, and most policy for that matter is based on.

The reality is diesel is the backbone of the global economy and its levels are critical to continuation of a stable economy. Diesel is directly critical at all levels from transportation, farming, manufacturing, construction and other economic components. Meaning very simply it is a key input to pricing and inflation as a result. Diesel prices impact food prices, housing prices, medical costs, heck pick almost anything.

Diesel is even more critical in the emerging nations economies, economies already stretched by the soaring US dollar, soaring input prices from the supply shock and soaring interest rates. That is another leg of this story, emerging countries are the furthest from the US governments minds. What is worrisome for developed nations, such as in Europe the reality, despite all the promises they may be out of their thoughts also. The unintended consequence here would be unrest at home and abroad as people can’t afford to eat or even get food for one. Not to sound alarmist but that is the potential when we look at stocks and prices in the distillate markets.

Diesel Prices

New York harbor wholesale diesel prices surged this week to more than $200 per barrel outside of a three-week period from late April into mid-May that is an all-time high. Keep in mind natural gas, gasoline and crude oil are way off their highs. These are all we hear about as that is what voters and newspapers audiences are led to believe they care about and as we established distillates prices are outside their ‘care” or “knowledge” zone. The US Administration has done a great job of keeping it that way.

Ultra-low sulfur diesel prices: The front-month futures price for ultra-low sulfur diesel (ULSD) for delivery in New York Harbor settled at $3.86/gal on October 6, a 30 cents/gal increase from September 1 (Figure 7). The ULSD-Brent crack spread (the difference between the price of ULSD and the price of Brent crude oil) increased 25 cents/gal during the same period and settled at $1.62/gal on October 6.

EIA SHORT-TERM ENERGY OUTLOOK Release Date: Oct. 12, 2022

What is astonishing from the US administration we hear of constant stories of how greedy American energy companies are and of gasoline prices. The only reason that comes to mind about why we don’t hear about the massive distillates profits is that it would part out the ignorance and negligence of current energy policies. Sound too far-fetched?

We saw in recent earnings reports from Chevron, Exxon and Phillips 66 to name a few American oil companies and refiners are experiencing their best-ever diesel margins. Bloomberg reports show “the profit of turning a barrel of crude into one of diesel hitting a record high of $86.5 per barrel, up roughly 450% from the 2000-2020 average of $15.7 per barrel.”

What fueled the Surge in Prices, and Margins?

  • US diesel demand has recovered faster than gasoline and jet-fuel from the impact of the pandemic.
  • Foreign demand had a similar affect and stocks had not been replenished since the VW case.
  • American diesel exports as a result turned up to record level.
  • US refining capacity is lower with less refineries
  • The US was importing a significant amount of Russian fuel oil before Russia’s invasion of Ukraine. Gulf of Mexico-based refiners turned this into diesel. The White House sanctioned Russian petroleum exports which ended that.
via RonH @Ronh999

As Bloomberg asks “That’s great for refiners, but bad for everyone else depending on the fuel. Retail prices have increased nearly half-a-dollar in just two weeks” Why do we, outside of energy market participants not know about it?

Options have Priced in High Volatility and Risk

Diesel Stocks

Diesel stocks collapsed in April which pushed retail prices to a record high, which we again breached in October. What is a scary thought is this has not allowed America to replenish its distillate storage in the low-demand seasons of spring and summer ahead of the winter. Simply put stocks are now almost as at the finish of last year’s heating season that ended in April.

via RonH @Ronh999

If inventories decline between October and April by their 20-year average of about 25 million barrels, the US will emerge from winter with a little more than 80 million barrels in stock. That’s an unlikely scenario, however: The oil market would try to keep inventories from falling that much, with prices rising high enough to slow the economy, curtailing demand. Over the last 40 years, American diesel inventories have never dropped below 85 million barrels, even at the end of the heating season.


Options for the US

Javier Blas of Bloomberg offers some thoughts here:

Northeast home heating oil reserve

If the White House opts to intervene, the less harmful measure would be to release a small reserve of diesel that the government keeps for emergencies. The Northeast Home Heating Oil Reserve only has one million barrels, so it would be, at best, a Band-Aid. But it’s better than nothing, and Biden should order its release. Releasing more crude from the Strategic Petroleum Reserve would do little to resolve the problem, since the bottleneck is refining.

Restricting or banning diesel exports.

Other interventions would have significant consequences, potentially harming American allies. In Washington, officials are mulling restricting, or even banning, diesel exports. If the measure is approved, it would leave neighbors including Mexico, Brazil and Chile short of diesel. In July, the last month with available full data, US diesel exports to Latin America hit a record high of 1.2 million barrels, double the amount a decade ago.

Compulsory oil company inventory build

Another option is forcing oil companies to build up stocks quickly ahead of the winter by setting a minimum inventory level, similar to what the European Union did for natural gas stockpiles. US officials are particularly worried about the northern part of the US East Coast, where inventories are low both seasonally and in absolute terms. The region, known in the industry’s jargon as PADD1A, is where the greatest demand is: Of the roughly 5.3 million households that use heating oil in America, more than 80% are in the Northeast.

We have a distillate problem; indeed, we are on the wings of the cyclone rapidly moving to the eye. This is one main street appears unaware that is about to hit despite it’s already arrived. Not an easy decision for President Biden to make for sure given it has been avoided for at least seven months. Oddly the way out would be the recession, if not depression, many say is coming. Let us hope it doesn’t come to that.

Source: TC, Bloomberg, EIA

From The Research Desk of TradersCommunity