Diesel outlook: Supply issues won’t go away anytime soon

Across the United States, diesel supplies remain tight; the East Coast in particular was pressured to keep reservoirs fully stocked. According to data from the Energy Information Administration, U.S. distillate inventories, which include diesel, are at least 28 million barrels below the five-year average. The East Coast accounts for more than half of this deficit.

Some of the supply issues date back to pre-Covid 19 events, including a fire in June 2019 that destroyed a key East Coast refinery. The Philadelphia Energy Solutions refinery had supplied about 30-35% of the diesel to the Mid-Atlantic and Northeast markets. The permanent loss of this refinery left the East Coast dependent on supply from a pipeline to the Gulf Coast and overseas imports, as well as local refineries.

A few other events on the horizon should keep prices for refined products like gasoline, diesel and jet fuel relatively high throughout the second quarter.

The first is the US refining maintenance season.

It should be a year of heavy maintenance as refineries have postponed major work in 2020 and 2021 due to Covid-19. Many have restricted the movement of external maintenance contractors to their sites, and in 2022 maintenance work has been postponed as companies seek to shore up deteriorating profit margins.

But refineries can’t put off maintenance indefinitely, and the bill is coming in terms of costs and plant downtime.

The Phillips 66 Bayway refinery in Linden, NJ, is scheduled to begin major work Feb. 2 that could affect production. The refinery is a crucial supplier of New York Mercantile Exchange Ultra Low Sulfur Diesel, or NYMEX ULSD, and what’s known as RBOB, or gasoline blending before ethanol is added.

Any complications with restarting the plant could drive up diesel and gasoline prices once maintenance is complete.

The second event concerns European Union restrictions on Russian refined products which are due to begin on February 5. Europe has weaned itself off Russian crude oil and natural gas, but replacing Russian diesel could prove trickier. Global markets could feel the pinch as Russia tries to find new customers.

Sanctions on Russian products mean diesel imports from Europe will cover longer distances on ocean tankers, tying up capacity and likely increasing shipping costs.

Diesel prices were relatively stable in January thanks to a mild Northern Hemisphere winter, with the exception of a few arctic gales. But those patterns are expected to change in February, with temperatures in the northeast expected to drop to below-average levels, which will increase demand for fuel oil.

The NYMEX ULSD futures market is always priced in a short-term, tightly-supplied market through what is known as backwardation. This is where current prices are higher than forward deferred prices. Right now, ULSD futures are trading at their highest levels since before Thanksgiving.

At that time, retail diesel prices in the United States were between $5.25 and $5.30 per gallon. Based on the most recent US average price of around $4.60 per gallon, a run above $5 should not be ruled out in the near term. By the end of January, retail diesel prices are expected to approach $4.75 per gallon.

Despite continued supply pressures, however, the steep highs of 2022 are likely to remain in the record books and not be surpassed this year.

Denton Cinquegrana is chief oil analyst at the Petroleum Price Information Service. OPIS is owned by Dow Jones, which also owns the Wall Street Journal.