Diesel hits record premium over gasoline and oil

Dwindling diesel inventories have driven prices to a record premium over gasoline and crude oil, showing how war, weather and other disruptions in global energy markets continue to produce price shocks and potential shortages.

While gasoline prices have risen about 14% this year, diesel has climbed about 50%, to $5.35 a gallon, according to AAA/Opis. Gains widened the gap between the two to an all-time high of $1.61. A year ago it was 23 cents. Bulk diesel, delivered in New York Harbor, traded at a record premium to crude oil in October, according to the Energy Information Administration, which also reported that the country had just 25 days of diesel reserve, the lowest since 2008.

Diesel, like gasoline, is refined from crude oil and is the fuel of choice for most engines in agricultural and manufacturing equipment, as well as the trucks and trains that move the nation’s goods. Its price at the pump includes refining costs, which often vary depending on the price of the natural gas used in the process.

One of the main drivers of the shortage is the war in Ukraine. Russian diesel exports have been more disrupted than those of its crude. The country’s reduction in natural gas flows to Europe has also increased refining costs there, while pushing end users such as power plants to switch from gas to diesel.

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But the war only amplified a pre-existing problem. Last year’s bad weather had already pushed up natural gas prices and cut off diesel supplies. And there has been little dip in demand for fuel during the pandemic, when millions of sequestered Americans stopped driving, while ordering more goods delivered to their homes by truck.

The high prices are hitting businesses, from mining and manufacturing companies to distributors and retailers, who are paying record sums to transport goods. Bath & Body Works Inc. Kroger Supermarkets, Hormel Foods Corp. and Kellogg Co. have all cited diesel costs as a headwind in recent months. These costs, passed on to consumers, could fuel inflation, after signs of slowing price increases recently sparked the biggest stock market rally since 2020.

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Meanwhile, major refiners including Valero Energy Corp., Marathon Petroleum Corp. and Exxon Mobil Corp., reaped windfall profits. Stocks of all three have gained more than 80% this year, while the S&P 500 has lost 17%.

Teleprinter	Security	Last	To change	To change %
VLO	VALERO ENERGY CORP.	135.46	-5.32	-3.78%
MRO	MARATHON OIL CORP.	31.45	-1.50	-4.57%
XOM	EXXON MOBIL CORP.	112.90	-1.24	-1.08%

Electrician Joe Madonia, of St. James, NY, drives a 2002 Chevy box truck to and from his job. He worked late to finish some in one day, so he doesn’t have to leave a second time.

“I’m as judicious as possible about where I need to go,” he says.

The diesel deficit should not last. But the colder months ahead come with risks because diesel is interchangeable with fuel oil, which is especially popular in homes in the northeast.

Extreme weather was particularly acute in 2021, when a freezing winter and sweltering Northern Hemisphere summer sent natural gas prices skyrocketing. This led to refinery cuts and a switch from gas to fuel long before Russia entered Ukraine. China has suffered heat waves, droughts and massive power outages, prompting its government to halt exports of petroleum products to preserve domestic supplies.

The net effect: a widening between demand and supply of diesel for the rest of the world of around two million barrels per day, according to Edward Morse, global head of commodities research at Citigroup.

Teleprinter	Security	Last	To change	To change %
VS	CITIGROUP INC.	48.37	-0.64	-1.31%

A pandemic drop in global refining capacity also contributed to the shortfall, along with a recent strike by refiners in France. US diesel inventories have been on a downward trend since the summer of 2020 and are now about 10% below their previous five-year low. In the Northeast, this figure is 40%.

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But the United States was still producing 200 million barrels more diesel in 2021 than it was consuming. The current domestic deficit is largely fueled by exports, especially to Europe, where it often sells for higher prices. Legal restrictions on the types of vessels that can transport fuel between locations in the United States add costs that encourage overseas sales.

“The Gulf Coast doesn’t sell it in Philadelphia or New York,” Morse says. “They sell it in Amsterdam and Rotterdam.”

Some hedge funds have taken advantage of the shortage by buying diesel for a future delivery date and then selling it as the date approaches and the price climbs, says Scott Shelton, energy analyst at ICAP. But weak supplies amplify fluctuations caused by bad weather or refinery outages. Recent fluctuations have been so severe that funds playing the delivery date game have been forced to reduce their positions to reduce their risk.

“It’s feast or famine,” for them, says Mr Shelton.

Diesel and heating oil inventories on the East Coast currently stand at around 25 million barrels, and an average winter will deplete them by around 20 million barrels, says Vikas Dwivedi, global oil and gas strategist at Macquarie Group. . However, a particularly cold winter “could easily attract 23, 24, 25 million, and that’s all you have,” he says.

More inventory is on the way. Gulf Coast refiners are ramping up production as they emerge from a maintenance season that helped lower October inventories. French refiners are back, while a major new refinery in Kuwait is also ramping up. The Chinese government, perhaps aiming to boost the country’s flagging economy, recently increased its oil export quotas.

Yet these factors remain tenuous and a repeat of the harsh winter of 2021 could trigger another cycle of higher prices, fuel switching and refinery operating cuts.

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Although Mr Dwivedi thinks the shortage will soon ease and prices will moderate, there is, he says, “a very credible probability that the East Coast may come out of winter with no distillates in stock”.