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Post: Commodities Corner: ‘Extraordinarily low’ U.S. diesel supplies keep prices for the fuel high at the pump

Gasoline prices have started to hit the brakes, but it has been full steam ahead for diesel, with U.S. supplies of the fuel used in freight transportation and agriculture dropping to their lowest on record for this time of year.

That has kept U.S. diesel prices high at the pump, with a gain of more than 8% in October, even as gasoline saw little change to prices this past month, based on data from GasBuddy.

Shortages of diesel fuel around the globe and in the U.S. spurred the latest price advance, said Brian Milne, product manager, editor, and analyst at DTN. Milne refers to U.S. diesel fuel inventory as “extraordinarily low,” with supplies in the Northeast “critically low.”

A cold winter for consumers in the New England states, the region with the largest concentration of households that use heating oil, would be “very problematic,” said Milne. Diesel can be used in place of heating oil for furnaces.

Domestic supplies of distillates, which include diesel and heating oil, stand at 106.8 million barrels as of the week ended on Oct. 28. That’s 19% below the five-year average and the lowest level on record for this time of year, based on data going back to 1982, according to the Energy Information Administration.

Refineries have generally reduced capacity as a result of policy preferences for biofuels, and power demand is an “incremental demand driver for distillates because the world is super tight” on liquefied natural gas, said Craig Golinowski, managing partner at Carbon Infrastructure Partners.

U.S. retail gasoline prices, meanwhile, have dropped more than 25% from their record high in June, while U.S. crude-oil prices



have fallen over 30% from their year-to-date peak.

“The world finds itself with a reasonable supply of crude oil and gasoline, but some distinct problems with diesel, heating oil, jet fuel, and kerosene,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service, a Dow Jones company. The four products are fetching prices of $150 to $200 a barrel, while crude-oil benchmarks are largely ranging from $85 to $100, he said, and of those four, diesel is the “most critical.”

Kloza estimates U.S. distillate demand at about 5.4 million barrels a day, and with domestic inventory around 106 million barrels, that is roughly just 19 days of supply. Joe DeLaura, senior energy strategist and executive director at Rabobank, says that “diesel is in a multidecade global inventory shortage.”

Diesel inventories at three major storage hubs excluding China — the U.S., Europe’s Amsterdam-Rotterdam-Antwerp hub, and Singapore — are at 132 million barrels, he said, compared with the 10-year average of 174 million.

Supply has been reduced, as China has kept export quotas down all year and the U.S. is “shedding refining capacity,” he said. Demand, however, is relatively strong and “inelastic,” given that even in a recession, people will still buy groceries and get Amazon deliveries, all of which are “transported by the diesel economy.”

Nine-month chart of U.S. retail diesel prices.


Retail prices for diesel, meanwhile, were at $5.292 a gallon on Nov. 2, based on data from GasBuddy. Prices have posted a decline of just over 9% from their record in June. “A price will be paid for the lack of investment in new drilling and new refineries,” says Salem Abraham, president of Abraham Trading.

The market must “ration the demand for diesel with higher prices,” said Abraham, who is also portfolio manager of the Abraham Fortress fund
If oil, natural gas
and diesel prices are high in a recession at the tail end of a pandemic, as some believe, “imagine what things look like in 12 [to] 24 months when we are past all of that and demand increases.”

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