Distillate markets are tightening again, lifting the prices of diesel and heating oil for the harvest and winter heating seasons and threatening to raise inflationary pressures again.
Refinery outages, changed global oil trade flows, a cautiously optimistic freight market in the United States, and inventories at some of the lowest levels in years have tightened the diesel market and are likely to further tighten it in the coming months.
Diesel futures in the U.S. are rising while the East Coast is scrambling for distillate fuels ahead of the winter as refineries go into planned maintenance.
The global diesel market is also tight, with inventories drawing down and the supply of sour crudes restricted by the OPEC+ alliance via their ongoing production cuts.
Rising diesel prices are set to seep into the broader economy with an increase in manufacturing and trucking costs, potentially leading to more inflationary pressures than the Fed and other central banks would have liked.
If interest rates remain higher for longer, concerns about the U.S. and global economy are set to intensify.
Slow Recovery In U.S. Trucking
The trucking industry in the United States seems to have overcome the “freight recession” from earlier this year, executives say. This could lead to higher diesel demand for the trucking business at a time of low inventories and refinery outages.
J.B. Hunt Transport Services said at a conference this week that the market is “coming out of a freight recession.”
The company’s internal planning now assumes that the market’s trajectory will be “slow and steady up,” J.B. Hunt’s president Shelley Simpson said, as quoted by FreightWaves.
As a result of higher demand and low inventories, diesel futures in New York have hit their highest level since January, according to Bloomberg’s estimates. AAA data also shows that retail diesel prices are now 30% higher than the five-year average, although not as high as the records seen in June 2022.
Low Inventories, High Crack Spreads
Distillate fuel inventories in the U.S. rose by 3.9 million barrels for the week to September 8, but stocks were still about 13% below the five-year average for this time of year, the EIA’s latest weekly inventory report showed.
Stockpiles are set to drop in the autumn by more than the typical seasonal average due to refinery maintenance, the EIA said in its latest Short-Term Energy Outlook (STEO) earlier this week. Related: Libya’s Oil Ports Are Operating Normally Despite Deadly Storm
Maintenance at the Irving Oil refinery in St. John, New Brunswick, and at the Monroe Energy refinery in Trainer, Pennsylvania, is set to reduce distillate fuel oil supplies to the East Coast, which consumes the most heating oil for winter home heating in the U.S.
The EIA expects U.S. distillate inventories will decline by about 11 million barrels in October, more than the average October draw from 2018–2022 of nearly 8 million barrels, largely because of the maintenance. Diesel crack spreads were higher than expected in August and will rise through October.
“East Coast distillate demand tends to increase in the winter months because many households in the U.S. Northeast use distillate heating oil, while Midwest distillate demand tends to increase in September and October because of agricultural demand associated with the harvest season,” the EIA noted.
The administration’s view for higher distillate crack spreads also reflects low global distillate inventories.
Global Stockpiles Are Low, Too
Globally, oil inventories are currently falling by 600,000 barrels per day (bpd) in the third quarter, and models point to moderating drawdowns to 200,000 bpd in Q4.
“But OPEC+ cuts to oil production keep global oil production lower than global oil demand,” the EIA says, noting that it expects Brent Crude prices to remain above $90 per barrel through the first quarter of 2024.
Refinery margins hit the highest level in eight months in August, as refiners were struggling to keep up with oil demand growth, especially for middle distillates, the International Energy Agency (IEA) said in its latest monthly report this week.
“Product cracks and margins reached near-record levels due to unplanned outages, feedstock quality issues, supply chain bottlenecks and low stocks,” the agency added.
Despite soaring oil product cracks and refinery margins, refinery throughputs in developed economies have been lower than a year ago due to supply shifts after the embargoes on Russian crude and products and the OPEC+ supply cuts, the IEA noted.
The OPEC+ cuts have reduced the availability of sour crudes from the Middle East which have higher yields of diesel and other distillate fuels.
Even if Saudi Arabia and Russia decide to begin unwinding the cuts in early 2024, global oil stocks “will be at uncomfortably low levels, increasing the risk of another surge in volatility that would be in the interest of neither producers nor consumers, given the fragile economic environment,” the IEA warned in its report.
With larger-than-normal distillate draws expected in the U.S. in the coming weeks and a tentative recovery in the trucking industry, diesel prices are set to rise, potentially ruining current inflation forecasts and leading to higher-for-longer interest rates to weigh on economic growth.
By Tsvetana Paraskova for Oilprice.com
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