By: Wall Street Journal – Dwindling stockpiles of diesel have driven prices to a record premium over gasoline and crude oil, showing how war, weather, and other disruptions to globalized energy markets are still producing price shocks and potential shortages.
While the price of gasoline is up about 14% this year, diesel has climbed about 50%, to $5.35 a gallon, according to AAA/Opis. The gains widened the gap between the two to an all-time high of $1.61. A year ago, it was 23 cents. Wholesale diesel, delivered into New York harbor, traded at a record premium to crude oil in October, according to the Energy Information Administration, which also reported the country had only 25 days of diesel in reserve, the lowest since 2008.
Diesel, like gasoline, is refined from crude oil and is the fuel of choice for most of the engines in farm and manufacturing equipment, as well as the trucks and trains that transport the country’s goods. Its price at the pump includes those refining costs, which often vary with the price of the natural gas used in the process.
A major driver of the dearth is the war in Ukraine. Russia’s exports of diesel have been more interrupted than those of its crude. The country’s curtailment of natural-gas flows to Europe has also lifted refining costs there while pushing end users such as power plants to switch from gas to diesel.
But the war only amplified a pre-existing problem. Last year’s severe weather had already lifted natural-gas prices and suppressed diesel supplies. And there was little drop in demand for the fuel during the pandemic when millions of sequestered Americans paused driving while ordering more goods delivered to their homes by truck.
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. Those costs, passed on to consumers, could feed inflation, after signs of easing price increases recently sparked the biggest stock rally since 2020.
Meanwhile, major refiners including Valero Energy Corp., Marathon Petroleum Corp. and Exxon Mobil Corp. have reaped exceptional profits. Shares of all three have gained more than 80% this year, while the S&P 500 has lost 17%.
Electrician Joe Madonia, of St. James, N.Y., drives a 2002 Chevy box truck to and from his jobs. He has been working late to finish some in one day, so he doesn’t have to drive back a second time.
“I’m as judicious as I can be about where I have to go,” he says.
The diesel deficit isn’t expected to last. But the coming colder months bring risk because diesel is interchangeable with heating oil, particularly popular in Northeast homes.
Weather extremes were especially acute in 2021, when a frigid winter and sweltering summer in the Northern Hemisphere sent natural-gas prices soaring. This resulted in refinery run cuts and gas-to-fuel switching well before Russia marched into Ukraine. China suffered heat waves, droughts, and massive blackouts, prompting its government to shut down oil-product exports to conserve domestic supply.
The net effect: a widening between demand and supply for diesel for the rest of the world of about two million barrels a day, according to Edward Morse, global head of commodity research at Citigroup.
A pandemic decline in global refining capacity has also contributed to the shortfall, along with a recent refiners’ strike in France. U.S. diesel inventories have trended down since the summer of 2020, and are now about 10% below their previous five-year low. In the Northeast, that figure is 40%.
But the U.S. still produced 200 million barrels more diesel in 2021 than it consumed. The current domestic deficit is driven largely by exports, particularly to Europe, where it often fetches higher prices. Legal restrictions on the types of ships that can shuttle fuel between locations in the U.S. add costs that encourage selling overseas.
“The Gulf Coast is not selling it to Philadelphia or New York,” says Mr. Morse. “They’re selling it to Amsterdam and Rotterdam.”
Some hedge funds have profited from 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 low supplies magnify the swings caused by weather or refinery outages. Recent swings have been so severe that funds playing the delivery-date game have been forced to cut positions to reduce their risk.
“It’s feast or famine,” for them, says Mr. Shelton.
East Coast inventories of diesel and heating oil are currently about 25 million barrels, and an average winter will deplete them by about 20 million barrels, says Vikas Dwivedi, global oil and gas strategist at Macquarie Group. However, an especially cold winter “could easily draw down 23, 24, 25 million, and that’s all you’ve got,” he says.
More inventory is on the way. Gulf Coast refiners are scaling up production, as they exit a maintenance season that contributed to October’s declining inventories. The French refiners have been coming back, while a new and major refinery in Kuwait is also ramping up. China’s government, possibly aiming to boost the country’s sagging economy, recently raised its oil-export quotas.
Still, those factors remain tenuous and a repeat of 2021’s severe winter could spur another cycle of higher prices, fuel switching, and refinery run cuts.
Although Mr. Dwivedi believes the shortage will soon abate and prices will moderate, there is, he says, “a very credible probability that the East Coast could exit the winter with no distillates in stock.”
