Ultra low sulfur diesel prices moved up on the key commodity market Monday in anticipation of now tropical storm and possible hurricane Laura, but the increase in ULSD lagged significantly behind the rise in gasoline prices.
While tropical storm Marco was making landfall in Louisiana Monday, the impact of that storm was seen as mostly a heavy rain event. But right behind it is tropical storm Laura, and the prospect of it becoming a hurricane, and possibly intensifying suddenly, helped propel product prices higher even as crude moved up slightly.
The ULSD contract on CME rose Monday by 3.96 cents per gallon, up to $1.2476, a gain of 3.28%. That took it to the highest level since just Aug. 12, when the price settled at $1.2572 a gallon.
The price of ULSD on CME has traded in a range of $1.20 to $1.28 per gallon consistently since July 2.
The big mover for the day was RBOB gasoline. It rose 6.46% to $1.3671 a gallon, the highest it has been since March 9.
Although it has not been confirmed, the market is expecting that there will be significant refinery shutdowns as it prepares for Laura. Specifically, with landfall possibly targeted at the area of the Texas-Louisiana border, that brings the large refining sector in Beaumont and Port Arthur, Texas, into play.
The biggest refinery in the country is the Motiva refinery in Port Arthur, with capacity of just over 600,000 barrels a day. That refinery is 100% owned by Saudi Aramco, the state-owned Saudi oil company.
There are also nearby refineries in Beaumont, operated by ExxonMobil with a capacity of 366,000 barrels per day, and two other refineries in Port Arthur besides Motiva: Valero, with 250,000 barrels a day, and Total, with a capacity of 225,000 barrels a day.
If Laura shifts to the east, it would have the capability to impact refineries in Lake Charles, Louisiana, and on over toward New Orleans, while a shift to the west brings the entire Houston refinery sector into play.
That RBOB gasoline would soar in value while diesel lags is not surprising, given the inventory position of the two products. It was gasoline demand that took it on the chin early in the pandemic. It fell to as low as just over 5 million barrels a day several weeks into the pandemic, down from a pre-pandemic peak of 9.696 million barrels a day, a drop of about 48%. Even with a cutback in refinery operations, that resulted in gasoline inventories measured in days’ cover shooting up to about 48 to 49 days’ cover at the end of April from about 29 days’ cover in February, even with sharp cutbacks in output.
That has not been the case for diesel. When the pandemic began, although gasoline demand plunged, diesel fell nowhere nearly as hard. Its pre-pandemic peak was 4.3 million barrels a day; its low point was 2.718 million barrels a day, close to 36%. Demand from the trucking sector restocking shelves was healthy and kept demand from falling further.
But the demand for jet fuel fell even harder than gasoline. The result was that refineries were producing higher amounts of distillate than normal, trying to avoid gasoline, and the distillate they were producing had shifted heavily toward diesel and away from jet.
Ultimately, inventories of distillates — mostly diesel — rose to more than 50 days’ cover by the end of May and stayed there for nine out of 10 weeks. In the history of the data series going back to the early 90s, that was unprecedented.
They’ve slipped to less than that in the past two weekly Energy Information Administration (EIA) reports. But at 49.2 days’ cover, they are still 15 days more than where they were at this point in the calendar last year and almost 17 days more than two years ago.
That difference in inventories is a key reason why the possibility of more than 1 million barrels a day of refining capacity being shut in is impacting gasoline far more than diesel.
Crude oil markets had a response even more muted than ULSD. West Texas Intermediate crude rose just 0.28%, or 28 cents, to $42.62 a barrel. Compared to the RBOB gasoline market, which reached the highest level since early March, the price of WTI isn’t even above where it was last Wednesday.
This minor increase occurred even as the Bureau of Safety and Environmental Enforcement, which regulates offshore activities, reported that production shut-ins in the Gulf of Mexico were 1.523 million barrels a day, or 82.4% of all Gulf of Mexico output. As a percentage of U.S. crude output, that’s about 14.2%.
But similar to ULSD, crude inventories in the U.S. are elevated. The most recent EIA report showed U.S.crude inventories at 35.1 days’ cover. A year ago, that was 25.5 and a year earlier, it was 23.6. With sufficient inventories both in the U.S. and worldwide, the sort of surge in crude prices that historically has accompanied the prospect or reality of a hurricane is not happening this year.