Date: Monday, January 30, 2023
Source: Wall Street Journal
Diesel makes the economy go, but it was only last year that the price of the fuel became the stuff of dinner-table conversation.
Retail diesel prices soared to an all-time high of $5.816 a gallon last June 19, part of the big run-up in energy costs following Russia’s invasion of Ukraine that strained transportation budgets and fed inflationary pressures. Though prices have dropped by more than $1 a gallon since then, many of the same elements that drove the surge in prices remain firmly in place.
Throughout the U.S., diesel supplies remain tight; the East Coast in particular has been pressed to keep tanks fully stocked. Based on data from the Energy Information Administration, U.S. distillate stocks, which include diesel, are at least 28 million barrels below the five-year average. The East Coast accounts for more than half that deficit.
Some of the supply issues go back to pre-Covid 19 events, including a June 2019 fire that took out a key East Coast refinery. The Philadelphia Energy Solutions refinery had provided about 30% to 35% of diesel to the mid-Atlantic and Northeast markets. The permanent loss of that refinery has made the East Coast dependent on supply from a pipeline to the Gulf Coast and overseas imports, as well as local refineries.
A few more events on the horizon are likely to keep prices for refined products like gasoline, diesel and jet fuel at relatively high levels through the second quarter.
The first is the U.S. refining maintenance season.
This is expected to be a year of hefty maintenance because refineries deferred important work during 2020 and 2021 due to Covid-19. Many limited the movement of outside maintenance contractors on their sites, and in 2022 maintenance work was put off as companies sought to shore up deteriorating profit margins.
But refineries can’t postpone maintenance forever, and the bill is coming due in terms of costs and down time at the facilities.
The Phillips 66 Bayway Refinery in Linden, N.J., is scheduled to begin important work on Feb. 2 that may affect output. The refinery is a crucial provider of New York Mercantile Exchange ultralow sulfur diesel, or NYMEX ULSD, and what is known as RBOB, or gasoline blendstock before ethanol is added.
Any complications in restarting the facility could push diesel and gas prices higher once maintenance is complete.
The second event is the European Union’s restrictions on Russian refined products scheduled to begin Feb. 5. Europe has been weaning itself off Russian crude oil and natural gas, but replacing Russian diesel may prove trickier. World markets may feel the impact as Russia tries to find new customers.
The sanctions on Russian products mean Europe’s diesel imports will be covering longer distances on oceangoing tankers, tying up capacity and likely raising shipping costs.
Prices for diesel have been relatively stable in January thanks to a mild winter in the Northern Hemisphere, save for a few blasts of Arctic weather. But those patterns are forecast to change in February, with temperatures in the Northeast expected to fall to below-average levels, adding to demand for heating oil.
The NYMEX ULSD futures market is still pricing in a near-term, tightly-supplied market through what is known as backwardation. This is where current prices are higher than forward deferred prices. At the moment, ULSD futures are trading at their highest levels since before Thanksgiving.
At that time, diesel prices at the retail level in the U.S. were in the $5.25-5.30 a gallon range. Based on the most recent U.S. average price of about $4.60 a gallon, a run to more than $5 should not be ruled out in the near-term. By the end of January, retail diesel prices should be approaching $4.75 a gallon.
Despite continuing supply pressures, however, the steep highs of 2022 are likely to stay in the record books and not be exceeded this year.