Diesel achieves a record premium over petrol and oil

Dwindling diesel inventories have pushed prices to record highs relative to gasoline and crude oil, demonstrating how war, weather and other disruptions in globalized energy markets are still producing price shocks and potential shortages.

While the price of gasoline has risen about 14% this year, diesel has risen 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. Bulk diesel, delivered in the Port of New York, traded at a record price against crude in October, according to the Energy Information Administration, which also reported that the country had just 25 days of diesel on 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 carry the country’s goods. Its pump price includes those refining costs, which often vary with the price of the natural gas used in the process.

A customer pumps gas into their car at a gas station on May 18, 2022 in Petaluma, California. Gas prices in California have surpassed $6.00 a gallon for the first time ever. The average price per gallon of regular unleaded gasoline in California is ((Photo by Justin Sullivan/Getty Images) / Getty Images)

One of the main drivers of the famine is the war in Ukraine. Russia’s diesel exports have been more disrupted than its crude. The country’s reduction of natural gas flows to Europe has also increased refining costs, prompting 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. Bad weather last year had already lifted natural gas prices and cut off diesel supplies. And there has been a small decline in fuel demand during the pandemic, as millions of sequestered Americans have stopped driving, ordering more goods delivered home via truck.

High prices are hitting businesses, from mining and manufacturing companies to distributors and retailers, who pay record sums to transport goods. Supermarkets Bath & Body Works Inc. Kroger, Hormel Foods Corp. and Kellogg Co. have all cited diesel costs as a headwind in recent months. Those costs, passed on to consumers, could fuel inflation after signs of easing price hikes recently triggered the biggest equity rally since 2020.

For the fifth time since he took office, the Biden administration announced the sale of an additional 20 million barrels of oil from the Strategic Petroleum Reserve's emergency stocks to try to curb high crude prices.

Storage tanks at the Valero Energy Corp. oil refinery in Memphis, Tennessee, U.S. on Wednesday, February 16, 2022. The Biden administration announced the sale of an additional 20 million barrels of oil from the Strategic Petroleum Reserve from their emerging (uke Sharrett/Bloomberg via Getty Images/Getty Images)

OIL MARKET FACES ‘NORMAL UNCERTAINTIES’, OPEC WARNS

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

Tickers Safety Last Change Change %
VLO extension VALERO ENERGY CORP. 135.46 -0.39 -0.29%
MRO extension MARATHON OIL CORP. 31.45 -1.50 -4.57%
XOM EXXON MOBIL CORP. 112.90 -1.23 -1.08%

Electrician Joe Madonia, of St. James, NY, drives a 2002 Chevy van to and from his job. He’s been working late to finish a few in one day, so he doesn’t have to go back a second time.

“I’m as judicious as I can be about where I go,” he says.

The diesel deficit is not expected to last. But the coming colder months come with risks because diesel fuel is interchangeable with heating oil, which is especially popular in Northeastern homes.

Extreme weather events were particularly acute in 2021, when a freezing winter and muggy summer in the Northern Hemisphere sent natural gas prices soaring. This has resulted in refinery cuts and a switch from gas to fuel well before Russia has entered Ukraine. China has suffered heatwaves, droughts and massive blackouts, prompting its government to shut down exports of petroleum products to conserve domestic supplies.

The net effect: a stretch in diesel supply and demand for the rest of the world by about two million barrels a day, according to Edward Morse, global head of commodity research at Citigroup.

Tickers Safety Last Change Change %
c CITIGRUPO INC. 48.37 -0.64 -1.31%

A pandemic drop in global refining capacity also contributed to the shortfall, along with a recent refinery strike 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, that figure is 40%.

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But the US still produced 200 million more barrels of diesel in 2021 than it consumed. The current domestic deficit is largely driven by exports, particularly to Europe, where it often fetches higher prices. Legal restrictions on the types of vessels that can carry 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,” says Mr. Morse. “They’re selling 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 rises, says Scott Shelton, an energy analyst at ICAP. But scarce inventories amplify swings caused by weather or refinery outages. Recent swings have been so severe that funds playing the delivery date game have been forced to trim positions to reduce risk.

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

Tankers wait in line to enter port

An oil tanker waits in line in the ocean outside the Port of Long Beach-Port of Los Angeles complex amid the coronavirus disease (COVID-19) pandemic, in Los Angeles, California, U.S. April 7, 2021. REUTERS /Lucy Nicholson (Photo Reuters)

East Coast inventories of diesel and heating oil are currently around 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, a particularly cold winter “could easily bring down 23, 24, 25 million, and that’s all you’ve got,” he says.

More inventory is on the way. Gulf Coast refineries are ramping up production as they come off a maintenance season that contributed to October inventories declines. French refineries are making a comeback, while a major new refinery in Kuwait is also growing. The Chinese government, perhaps with an eye to boosting the country’s ailing economy, recently increased its oil export quotas.

However, these factors remain subdued and a repeat of the harsh 2021 winter could spur another cycle of higher prices, fuel switching and refinery cuts.

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Although Mr. Dwivedi believes the shortage will soon ease and prices will moderate, there is, he says, “a very credible likelihood that the East Coast could emerge from the winter without spirits supplies.”

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