(Editor’s note: a statement from Pilot FlyingJ has been added.)
The diesel market headed in divergent directions Wednesday, adding to the uncertainty and confusion that buyers have faced now for weeks.
Looming large over trading was the weekly release of statistics from the Energy Information Administration, which showed that inventories of ultra low sulfur diesel (USLD) on the U.S. East Coast, already at close to record-breaking lows, managed to fall yet again.
But at the same time, the price of ULSD on the CME commodity exchange, which had been outpacing the price of crude and gasoline for weeks, rose at a far slower pace than the other members of what is known as the petroleum “complex” on CME.
ULSD on CME rose 1.9 cents a gallon to $3.9512. That was an increase of just 0.48%, which stood in sharp contrast to a 5.77% increase in the price of West Texas Intermediate crude, a 4.93% rise in the price of international crude benchmark Brent and a slightly more than 4% rise in RBOB gasoline, an unfinished gasoline blendstock that serves as the trading proxy for gasoline.
The overall increase in crude prices was seen as a reaction to several pieces of news regarding Russia and Ukraine, including the Ukrainian shut-off of some Russian natural gas supplies.
There was no clear reason why ULSD lagged crude on CME. The news on diesel Wednesday was mostly bullish, particularly the data on the further reduction of East Coast ULSD stocks.
The most recent statistic released Wednesday is that last week, ULSD stocks on the East Coast were 19.19 million barrels. That’s down more than 1 million barrels from the prior week and down 50% from the start of the year.
It is difficult to say that the stocks are the lowest ever, because there are other weeks in history when they have been less than 19.19 million barrels. However, ULSD was not as widely used during those times so the current tight supplies are coming against the backdrop of a much wider market for the cleaner fuel.
The draw on the East Coast came even as physical markets on Tuesday had signaled there might be an easing of the squeeze.
Assessments of the physical spot market supplied to FreightWaves by General Index, a benchmark administrator, showed on Tuesday that East Coast tightness might be loosening.
The assessments, like those of other agencies such as S&P Global Commodity Insights (Platts), are for barrels to be delivered via barges or pipelines in a relatively short time frame, whereas the CME ULSD price is for barrels to be delivered in New York Harbor anytime in June. The physical assessments are therefore a better indication of current market conditions.
On Monday, General Index assessed the price of ULSD in New York Harbor at 66.25 cents a gallon more than the price of diesel in the Gulf Coast. In normal times, that spread might be a few cents. In the four days leading up to Monday’s assessment, the range had been between 50 and 65 cents, indicating extreme East Coast tightness.
But on Tuesday, the spread narrowed to 33.5 cents, suggesting some relief might be in sight. On Wednesday, General Index had the spread about 1 cent wider, signaling that the easing seen Tuesday was stable for at least one day.
One development in the market that may bring relief to buyers is that the math on exporting diesel to Europe is starting to look negative and may mean that keeping the product in the U.S. is the most attractive deal out there.
The weekly EIA statistics don’t break out exports by specific grades, so diesel exports would be under the broad category of distillate exports, which can include other non-jet fuel distillate products such as heating oil or high-sulfur diesel.
Last week, according to EIA, exports were 1.357 million barrels a day. The five-year average for the first week of May is 1.182 million b/d, so exports have been running somewhat higher than normal.
Meanwhile, imports at 121,000 barrels a day last week were not far off the levels of other reports from the first week of May but were far less than imports were running in the first three months of the year.
The General Index price for ULSD in Rotterdam, Netherlands, is priced in metric tons, but it works out to about $3.90 a gallon. Meanwhile, the East Coast U.S. price published Monday by General Index came in at about $4.30 a gallon, which should make that the most attractive market for diesel exports as well as an incentive to keep the barrels in the U.S. rather than shipping them to Europe or Brazil, another popular destination.
Patricia Hemsworth, a senior vice president at Paragon Global Markets, said the export activity of the past weeks has been “extraordinary.”
The export market discouraged suppliers from shipping diesel up the Colonial Pipeline to the East Coast from the Gulf Coast for several weeks, she said. The Colonial usually needs to allocate space, because demand for space exceeds supply. But the movement of products into export markets at levels more than normal resulted in Colonial reducing its allocations, a rare step, according to Hemsworth.
Continuing declines on the East Coast have raised concerns about adequate supplies for truckers and other consumers.
The one statement FreightWaves has been able to obtain 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 spokeswoman said, “Love’s is monitoring the fluid situation on the East Coast. The company isn’t currently restricting purchases. Love’s will continue to use its logistics and fuel delivery companies, Musket and Gemini, to minimize impacts to customers.”
Pilot FlyingJ supplied its comment to FreightWaves: “We are aware of concerns over diesel supply in specific markets across the United States. Most markets in the eastern U.S. remain extremely low on diesel inventory levels and refinery issues are creating tightness in the St. Louis and Indianapolis markets. To prepare, Pilot Company has built a resilient supply chain over the last several years and is taking additional actions to secure extra supply and mobilize our fleet to deliver diesel to areas facing tight availability, such as Virginia and Georgia. All other markets are currently adequately supplied. We are also undertaking contingency planning to continue to have a steady source of diesel fuel. We are closely monitoring the situation and strive to remain the most reliable network of travel centers for our customers.”
But a Bloomberg report quoted John Catsimatidis, the CEO of United Refining, a small East Coast refiner and fuel distributor, as seeing trouble ahead for diesel consumers.
“I wouldn’t be surprised to see diesel being rationed on the East Coast this summer,” Catsimatidis told Bloomberg. “Right now inventories are low and we may see a shortage in coming months.”
Another factor in the tight market is not new, but with the reduced diesel supplies out of Russia — a major supplier — it is becoming more significant: a loss of U.S. refining capacity.
Refinery utilization nationwide was at 90% last week. That is right about in the middle of where utilization has come for the first weekly report of May over the past six years, excluding the pandemic-related operations of 2020.
The problem from the consumer side is that the base against which that is measured has declined. The current operable capacity listed by the EIA is 17.941 million barrels a day (as of February). At the start of 2020, that figure was at its high-water mark of 18.976 million.
The EIA, in July of last year, said it had removed six refineries from its permanent base of refining capacity. While that can be offset by capacity expansions and de-bottlenecking elsewhere, the end result is that even at full capacity — and the nation’s refining system never operates at 100% — there is less capability to produce refined products in the U.S. than there was two years ago.