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Tight inventories push diesel past crude, gasoline; OPEC+ cuts secondary

Days’ cover for distillates, a key number, is below 30 for 1st time in weeks

Photo: Jim Allen/FreightWaves

Diesel futures prices roared ahead Wednesday, reacting more to yet another report of tight inventories than the news of a big cut in OPEC+ allocations that should translate into a crude output reduction of unknown size.

Ultra low sulfur diesel (ULSD) prices on the CME commodity exchange climbed 15.11 cents a gallon at the settlement, an increase of 4.27%, to $3.6869 a gallon. It’s the third day in a row of increases on either side of 15 cents, with prices rising 14.75 cents a gallon Monday and 16.67 cents a gallon Tuesday. 

Those three days of higher prices mark a 14.4% increase since a settlement of $3.2216 a gallon Friday for the November ULSD contract.

The 4.27% increase Wednesday was far above the 1.24% rise in the price of West Texas Intermediate crude, the U.S. benchmark, and a decline of 1.45% in the price of RBOB gasoline, an unfinished blendstock that serves as the proxy for gasoline trading.

Spurring much of the surge in diesel prices was the weekly report from the Energy Information Administration. The EIA had reported that U.S. stocks of ULSD slipped to less than 100 million barrels after eight consecutive weeks of holding above that level. But even when the number was below 100 million barrels back in the spring, that was unique; ULSD inventories had not been under that figure since 2014.

The draw in inventories to 99.6 million barrels was the result of several factors. Imports of 81,000 barrels a day of ULSD were the lowest since May and the second lowest this year. Exports of all nonjet distillates at 1.65 million barrels a day were among the higher figures recorded in 2022. And while refinery production of both distillates and ULSD were at healthy levels, product supplied for distillates, the EIA term for demand, came in at 4.1 million barrels a day, the second week at more than 4 million barrels per day after 19 out of 20 weeks when it was less than that. 

The end result was that distillate stocks measured by days’ cover — the amount of consumption that can be met by inventories only — dropped to 29.9 days. That marks a significant three-week decline that went 32.7-34.2-31.9.

However, the ULSD inventory as a percentage of the five-year average for the final week of September was about 83% of the average. It had been down close to 80% a few weeks ago so by that standard the inventory picture could be seen as improving.

Diesel markets moved higher despite two headwinds. Natural gas prices have been weakening, and the tie between diesel and natural gas prices can often be tight. U.S. natural gas prices measured by the Henry Hub benchmark prices were more than $10/thousand cubic feet in August. Although they moved up about 9 cents Wednesday and are just under $7, it is still a significant decline from two months ago.

Meanwhile, the European pipeline natural gas price, the Dutch TTF, is down by roughly half from its August peak.

Lower natural gas prices can pull down diesel two ways. One is that diesel can be substituted for natural gas in many industrial applications or to generate electricity. Lower natural gas prices reduce the incentive to do so.

The second is that diesel production requires hydrogen to desulfurize the fuel, and natural gas is the energy source used to produce hydrogen.

A second headwind Wednesday, which didn’t seem to have much impact at all, is the renewed rise in the value of the U.S. dollar. It rose more than 1% after several days of decline, as measured by the DXY contract on the ICE commodity exchange.

That may have restrained the increases in crude prices, with WTI rising 1.43% and Brent 1.71%, on a day when a cut of 2 million barrels per day in OPEC+ quotas dominated the headlines.

But as this chart from S&P Global Commodities Insight shows, the cuts are going to be to allocations that for the most part aren’t being met anyway. Much of the online chatter Wednesday was about how much reduction in actual production will result from OPEC’s decision, which runs only for November and December. 

Source: S&P Global Commodity Insights

A general consensus seemed to land on a number of 750,000 to 1 million barrels per day in reductions. At the same time, while Strategic Petroleum Reserve (SPR) releases are expected to continue into November, with a recent tender for November barrels having recently been posted, a statement by the White House suggested they may go past that. “The President will continue to direct SPR releases as appropriate to protect American consumers and promote energy security,” the statement said.

Also in the statement, possibly as a result of frustration that U.S. output has been stuck on 12 million to 12.1 million barrels a day for several weeks, the White House said President Joe Biden “is directing the Secretary of Energy to explore any additional responsible actions to continue increasing domestic production in the immediate term.”

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.