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What’s Up with the Diesel Fuel Supply and Prices

    Diesel is the lifeblood of the global economy. Trucks, trains, tractors, boats, barges, machines, and more all rely substantially on diesel and the US consumed about 34 billion gallons of it last year. It’s a casual statement we’ve repeated countless times in reports and news releases. With prices hitting record highs and concern about potential shortages, let’s take a closer look at the current situation, which factors are driving prices and inventories, and the outlook for lowering prices back down and increasing the supply.

    Prices are rising. The national average for diesel is $5.31, down about 2 cents from last week, but up $1.59 from a year ago according to the Energy Information Administration (EIA). In California where prices are $6.25 a gallon; diesel prices are down about 7 cents from the previous week, but up $1.60 a gallon from a year ago. Basic economics drive fuel prices: higher demand and tighter supplies.

    Inventories are low. The EIA notes that US inventories of distillate fuel oil have been below the five-year (2017–2021) low since the start of 2022 and more than 20% below the five-year average. Inventories are low due to refinery maintenance,  lingering effects of the COVID pandemic, labor shortages, as well as slowed production.

    We’re going into the winter demand season. This time of year is to diesel what the vacation driving season is to gasoline; a period of surging demand but with some new variables thrown in.  

    Harvest time is here, driving an uptick in demand for the off-road diesel fuel supply for farmers to power their combine harvesters, corn pickers, and other diesel-powered machines essential for getting product out of the field. This boost in demand for diesel then trickles down to transporting bulk grain, beans, corn, and other commodities to market via railroad, river barge, or truck. In 2020, the farm sector used about 3.6 billion gallons of distillate fuel oil

    Home heating oil demand is about to rise.  It is essentially #2 diesel fuel. The Northeast, which accounts for 85% of all US residential heating oil sales, used 2.6 billion gallons in 2020; that was about 5.3 million households. During a typical New England winter, a 2,500 square foot home might use about 5-7 gallons of heating oil each day. This competes with highway diesel fuel in the marketplace.

    Refinery maintenance and reduced supplies remain a factor. Inventories of diesel fuel are low; no question about it. According to the EIA, distillate fuel supplies are the lowest since they started keeping records in 1951. Coming out of the pandemic, US refining has been seeking a return to normal cycles of production and maintenance. October had the most refinery maintenance in a while and, therefore, disrupted production more than in previous years.

    Global factors have cut into refining capacity since 2020, including lower refinery utilization in Europe following labor strikes. Action by Organization of Petroleum Exporting Companies (OPEC ) to curtail production by 2 million barrels a day has helped boost prices. Also, according to EIA, the ongoing Ukraine-Russia conflict has further impacted the global supply of crude and other petroleum products. For example, reduced natural gas imports into Europe from Russia may be driving up distillate demand as a potential alternative fuel for home heating oil or electric power generation.

    Outlier labor issues could be a factor. Other factors don’t have anything to do with the cost of crude or refining it, but rather ease of delivering it to market. The maritime labor rules known as the Jones Act requires the use of US flagged vessels to deliver shipments between US ports with American crews. This means getting fuel from the gulf coast to NY Harbor could be more expensive than shipping it across the Pacific Ocean to export to Europe.  Today, the US exports about a million barrels of distillate fuel daily. Some have called for the Administration to waive the Jones Act requirements temporarily to ease pressure in the Northeast, as was done during the cyberattack on the Colonial Pipeline, and to provide a shipment of diesel fuel to Puerto Rico after Hurricane Maria.

    On the upside, there are some factors that will help improve the current diesel fuel price and supply situation:

    Seasonal refinery maintenance is mostly done- meaning a return to normal output levels soon, which should help allay fears of shortages, especially in the northeast.

    Getty ImagesRecessionary pressures are slowing truckers demand for diesel. Rising inflation and tighter access to credit have slowed freight demand for several months. Normally diesel demand gets a boost this time of year due to holiday shipping and a boost in freight demand. However this demand is already softening. In past years of the pandemic the glut of freight dominated the headlines. Last year, over 70 container ships were waiting for weeks to unload at West Coast ports, with a demand to move these goods to market. That situation has resolved.

    Harvest season is almost over, dropping demand for off-highway diesel fuel that competes with highway diesel fuel.

    Renewable diesel and biodiesel boost fuel supply. Diesel engines of all kinds can use renewable biodiesel fuels. In 2021, biodiesel and renewable diesel fuel provided about 132,000 barrels a day of supply into the US market; that works out to about 3.2 billion gallons on an annualized basis.

    The outlook: Expected cyclical seasonal pressures on diesel fuel supply and demand, including the fall harvest and holiday shipping, are playing out as noted. The slowing US economy will drive down demand for diesel, lowering prices, and easing overhyped supply concerns. Global conflicts and extreme weather conditions bring the most uncertainty. According to The Weather Channel, w​inter temperatures are once again expected to be split between a warmer than average South and colder than average North, with colder risks in parts of the East. While that could be a concern in the coming months, forecasts have been known to change. Afterall, it’s 75 degrees in Boston on this early November day.

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