The diesel market took opposite paths on Wednesday, adding to the uncertainty and confusion that purchasers have been dealing with for weeks.
The weekly publication of information from the Energy Information Administration loomed large over trading, showing that inventories of ultra-low sulfur diesel (USLD) on the United States’ East Coast, which were already near record lows, managed to decrease even further.
However, the price of ULSD on the CME commodity exchange, which had been exceeding the price of crude and gasoline for weeks, climbed at a much slower rate than the other members of the CME’s petroleum “complex.”
On the CME, ULSD increased 1.9 cents a gallon to $3.9512. That was a 0.48 percent increase, compared to a 5.77 percent increase in West Texas Intermediate crude, a 4.93 percent increase in international crude benchmark Brent, and a slightly more than 4 percent increase in RBOB gasoline, an unfinished gasoline blendstock used as a trading proxy for gasoline.
The general rise in crude prices was perceived as a reaction to various pieces of news involving Russia and Ukraine, notably the Ukrainian shutdown of some Russian natural gas supplies.
There was no obvious explanation for why ULSD trailed crude on the CME. The news on diesel on Wednesday was mainly positive, especially the report on continued reductions in East Coast ULSD inventories.
According to the most recent data issued on Wednesday, ULSD stocks on the East Coast were 19.19 million barrels last week. This is down more than a million barrels from the previous week and 50% from the start of the year.
It is tough to argue that stocks are the lowest they have ever been because there have been other weeks in history when they were fewer than 19.19 million barrels. However, because ULSD was not as widely used at the time, the current scarcity is occurring against the backdrop of a considerably larger market for cleaner fuel.
The pull on the East Coast came despite physical markets signaling a lessening of the stress on Tuesday.
On Tuesday, assessments of the physical spot market provided to FreightWaves by General Index, a benchmark administrator, indicated that East Coast tightness may be easing.
The evaluations, like those of other agencies such as S&P Global Commodity Insights (Platts), are for barrels to be delivered in a relatively short time period through barges or pipelines, but the CME ULSD price is for barrels to be delivered in New York Harbor at any time in June. As a result, physical examinations provide a more accurate picture of actual market conditions.
According to General Index, the price of ULSD in New York Harbor is 66.25 cents per gallon higher than the price of diesel on the Gulf Coast. Normally, such a spread would be a few cents. The range had been between 50 and 65 cents in the four days leading up to Monday’s evaluation, showing acute East Coast tightness.
However, the difference narrowed to 33.5 cents on Tuesday, indicating that some relief may be on the way. On Wednesday, the General Index spread was around a cent wider, indicating that the softening witnessed on Tuesday had lasted at least one day.
One market trend that may provide solace to buyers is that the math on exporting diesel to Europe is starting to look negative, which may indicate that keeping the fuel in the United States is the most appealing offer available.
Because the weekly EIA statistics do not split down exports by grade, diesel exports would fall under the broad category of distillate exports, which can include other non-jet fuel distillate goods like heating oil or high-sulfur diesel.
According to the EIA, exports were 1.357 million barrels per day last week. The five-year average for the first week of May is 1.182 million b/d, indicating that shipments have been slightly higher than usual.
Meanwhile, imports were 121,000 barrels per day last week, which was not far off from other numbers from the first week of May but significantly less than imports were running in the first three months of the year.
In Rotterdam, Netherlands, the General Index price for ULSD is in metric tons, however, it works out to around $3.90 per gallon. Meanwhile, the East Coast U.S. price released Monday by General Index was at $4.30 per gallon, making that the most appealing market for diesel exports as well as an incentive to keep the barrels in the United States rather than exporting them to Europe or Brazil, another preferred destination.
According to Patricia Hemsworth, senior vice president at Paragon Global Markets, the recent export activity has been “exceptional.”
For several weeks, the export market prevented suppliers from transporting diesel up the Colonial Pipeline from the Gulf Coast to the East Coast, she added. Space is frequently allocated by the Colonial because demand exceeds availability. However, the increased transfer of products into export markets resulted in Colonial lowering its allocations, a rare step, according to Hemsworth.
Continued East Coast decreases have raised concerns about adequate supplies for truckers and other consumers.
The only word obtained by FreightWaves from any of the big three truck stop chains — Love’s, Pilot Flying J, and Travel Centers of America (NASDAQ: TA) — was from Love’s last week, when a representative stated, “Love’s is following the fluid situation on the East Coast.” Purchases are not currently restricted by the firm. To minimize customer disruption, Love’s will continue to use its logistics and gasoline delivery firms, Musket and Gemini.”
At the time of publication, requests for comment from those three truck stops had not been addressed.
However, according to a Bloomberg story, John Catsimatidis, CEO of United Refining, a tiny East Coast refiner and fuel distributor, sees difficulties ahead for diesel consumers.
“I wouldn’t be surprised if diesel is rationed this summer on the East Coast,” Catsimatidis told Bloomberg. “Inventories are currently low, and we may face a shortage in the next months.”
Another reason contributing to the tight market is not new, but with lower diesel supply from Russia — a big provider — it is becoming more significant: the loss of US refining capacity.
Last week, nationwide refinery utilization stood at 90%. That is around where usage has been during the first weekly report of May for the last six years, excluding the pandemic-related procedures of 2020.
The issue for consumers is that the baseline against which this is judged has shrunk. The EIA lists the current operating capacity as 17.941 million barrels per day (as of February). That figure reached a peak of 18.976 million at the start of 2020.
In July of last year, the EIA announced that six refineries had been removed from its permanent base of refining capacity. While this can be compensated by capacity increases and de-bottlenecking elsewhere, the net result is that even at full capacity — and the nation’s refining system never operates at full capacity — the United States has less capability to create refined goods than it did two years ago.
