CHATTANOOGA, TENNESSEE — According to an Energy Information Administration report released the same day that a leading energy risk management executive said the market was “running on fumes,” diesel inventory levels rose last week.
“That is a problem for everyone who needs to put it in the truck and burn it,” Elaine Levin, president of Powerhouse, said of current diesel inventories during her appearance at the FreightWaves Future of Freight Festival on Wednesday.
The EIA data released on Wednesday for the week ending Friday showed a significant increase in ultra-low sulfur diesel (USLD) inventories on the East Coast. These stocks, as well as total distillate inventories for the country as a whole, have been significantly lower than historical norms, contributing to higher diesel prices relative to gasoline and crude.
With winter approaching, inventory levels will improve in small steps rather than leaps and bounds. However, the trend will be crucial.
The total distillate inventory figure for the United States, which is 85% to 90% diesel with other distillates like heating oil mixed in, increased slightly to 106.78 million barrels, up from 106.357 million. This puts inventories at 81.8% of the five-year average for the final week of October, excluding data from 2020 that was skewed due to the pandemic. This 81.8% figure is the highest in several weeks.
The ULSD figure for the East Coast also increased by nearly 1.6 million barrels, a one-week increase of about 7.5%, which is a healthy number. Inventories relative to the five-year average increased to 60.8%, up from 59.9%. These are all good gains for one week.
On the CME, ultra-low sulfur diesel rose 5.63 cents per gallon on the day to $3.6774. That is the price for the December contract. With the November contract expiring on Monday, the front-month price for December is now at its lowest level since early October, potentially providing some relief to diesel buyers.
Wholesale markets are already showing signs of relief. The ULSDR.USA data series in FreightWaves SONAR, which represents the average wholesale diesel price for the entire United States, fell to $4.197 per gallon on Wednesday, down from $4.311 just two days ago.
However, with the prospect of higher prices throughout the winter, Levin believes it may be time for companies exposed to the price of diesel to take steps to mitigate that risk.
“Many end users of fuel set a budget, but then do nothing to secure that budget,” she explained. “Hope and prayer are not hedging strategies.”
Levin also stated that the 106-million-barrel figure for distillate inventories is dangerously close to the 100-million-barrel mark. She referred to it as a critical number because inventories below that level cause operational issues in the fuel distribution system and may result in allocations.
According to Levin, the disadvantage of fuel surcharges administered by trucking companies is that they are tied to a weekly price that may or may not keep up with rising wholesale prices.
Levin also mentioned that the current market structure provides an opportunity to hedge diesel at significantly lower prices. Backwardation is a market structure in which the most expensive price is the most recent price — in the case of ULSD on the CME, December — and the price falls as the trading calendar is extended.
For example, the December 2022 settlement of $3.6774 occurred on the same day that the June ULSD settlement of $3.0891 per gallon and the December 2023 settlement of $2.93765 per gallon. Backwardations occur when a market’s inventories are low.
“There will be an oil sale in the future,” Levin said. “You just have to know how to get to it.”
