WONK SPEAK

Submitted by Hardscrabble Farmer

“Historically, the spread moved up and down over zero enough that it’s accurate to say there’s little difference between the two. The recent spread is an anomaly…”

Um, ‘kay.

Zerohedge

Diesel Price Drop, Rising Inventories Suggest East Coast Relief Possible

By John Kingston

Diesel consumers on the East Coast received some news Wednesday that may suggest an easing of the tight physical market squeeze in the region.

There have been head fakes suggesting a softening of markets in the weeks since the East Coast diesel market ran away from the rest of the country. But they proved short-lived, as the weekly national average retail diesel price published Monday by the Energy Information Administration was $5.613 a gallon. The East Coast price was 33.1 cents more than that after a three-week increase that took the spread from 4.9 cents on April 25 up to 19.2 cents the following week and 28.4 cents a week later before the latest jump.

Historically, the spread moved up and down over zero enough that it’s accurate to say there’s little difference between the two. The recent spread is an anomaly, albeit one that is costing drivers on the East Coast a lot of money.

But among the data in the latest weekly report of the EIA released Wednesday, there were several numbers that suggest there is reason to think the squeeze might have become less severe.

The key driver in the squeeze has been inventory levels on the East Coast. But the latest report shows inventories turning up.

Inventories of ultra low sulfur diesel in what the EIA calls PADD 1 — the East Coast — rose 1.21 million barrels last week to 20.4 million barrels. PADD 1 inventories of ULSD on the East Coast had declined in 13 of the 15 previous weeks and had dropped six weeks in a row before the increase the EIA posted Wednesday.

Inventories remain well below historic norms. If the bloated figures from 2020 are not counted, the average size of PADD 1 ULSD inventories in the second weekly report of May over the past five years is 36.8 million barrels. That means that even after the latest increase, East Coast ULSD inventories were just 55.4% of that five-year average.

Prices in spot and futures markets also may be providing a glimmer of hope for consumers. ULSD settled Monday at $3.6681 a gallon, down 13.12 cents on the day. It’s the lowest settlement since April 12, and since the start of May, ULSD is down more than 53 cents, including a decline of more than 25 cents in just the past three trading days.

The decline also was notable because it outpaced the performance of crude and RBOB, an unfinished gasoline blendstock that is used as a proxy for gasoline trade. That trend has been in place for most of May. On the first trading day of the month, the value of a barrel of ULSD was about $69 more than the value of a barrel of Brent crude. That spread is down to about $47.65.

The weekly data report had other figures that could signal the worst on the East Coast might be over, even if it has a long way to climb back toward some semblance of normalcy.

• U.S. refineries ran at 91.8% of capacity. It’s the highest level since August 2021. The nameplate figure for capacity used by the EIA has been reduced over the years, but it’s only down about 1% since last August. On the East Coast, refineries ran at a rate of 95%. East Coast refineries have not run at 95% or above since May 2018, and instances of it in general are rare. But it’s a very different world on the East Coast: Operable capacity back in 2018 was 1.224 million barrels a day. It is now listed as 818,000.
• Stocks of all distillates, which includes diesel but does not include jet fuel, rose to 105.3 million barrels, up from 104 million barrels nationwide a week earlier. Inventories of ULSD nationwide rose to 95.2 million barrels from 94.6 million, though with PADD 1 up more than 1 million barrels, math on the overall national increase means the country outside of PADD 1 declined.
• The total distillate in inventories rose even as the country was consuming more product. Products supplied in distillates — which is mostly diesel but includes some other products, such as heating oil — increased to 3.816 million barrels a day from 3.777 million a week earlier. It’s still down 243,000 barrels per day from a year ago, approximately 5.9%, though jet fuel, which pulls from the same pool of distillate feedstocks as diesel, has seen its consumption increase 439,000 barrels a day, a 37% jump. The total amount of distillate molecules being demanded across various applications is rising, and the rising inventory balances this week suggest those needs were met without a significant pull on stocks.
• Exports of distillates fell. Exports in the EIA weekly report are not broken out by specific product, such as ULSD. But exports of diesel have been cited as a cause of the East Coast squeeze. Total non-jet distillate exports fell to just over 1 million barrels per day last week. It’s the lowest export figure in the last eight weekly reports, where exports a month ago got up to 1.74 million barrels a day. Partly offsetting that, however, is that imports of ULSD — specific import figures are available by category of product, unlike exports — were at the fourth-lowest weekly level they’ve seen all year.

“Distillate exports were strong up until this week and refinery runs are up,” Stephen Jones of Argus Media said. Despite speculation about demand destruction, Jones noted that demand figures in the EIA report were up about 1% from the prior week.

Jones said that in addition to higher refinery runs in the U.S., European refinery runs are running about 1.5 million to 2 million barrels a day more than they were in March and April. The runs are being raised as the region deals with the impact of lost Russian oil because of sanctions, including the reduction in diesel exports from Russia. “They’re going to make more diesel and gasoline, and the sanctions may fall short and not have as big an impact on the loss of supply,” Jones said. “We could end up with significantly excess gasoline for the European market, and a well-supplied [European] distillate market.”

In physical markets, the premium of East Coast diesel relative to Gulf Coast diesel narrowed for the second day in a row. According to benchmark administrator General Index, its assessment for ULSD in New York Harbor was roughly 22.25 cents more than the price in the Gulf Coast. A day earlier, it was 35.75 cents, which on the surface would suggest East Coast supplies easing relative to the Gulf Coast.

However, that market last week did narrow for a few days before blowing back out. It opened the week at approximately a 66-cent spread in favor of the East Coast, per the General Index assessments, came in as tight as 33.5 cents and then blew back out to 76 cents Monday. The reversal has cut the spread by roughly 53 cents.

The various signs pointing downward in the diesel market have not yet made it to the pump. The DTS.USA data series in FreightWaves SONAR shows the national retail average rising to $5.621 a gallon Wednesday, up from $5.577 a week ago.

But wholesale prices do react quickly to movements in the spot market for diesel. The national average wholesale diesel price reflected in the ULSDR.USA data series in SONAR was $4.234 per gallon Wednesday. It was $4.404 a gallon just two days earlier and was as high as $4.718 a gallon on May 3.

Retailers have been slow to move prices down, possibly because they have been so whipsawed by rapidly rising and falling prices that they are reluctant to follow all downward movements in wholesale prices.

The end results, though, are strong retail margins, as evidenced in SONAR’s FUELS.USA data series, which at $1.387 a gallon Wednesday is significantly higher than normal rates near $1 to $1.05 a gallon. FUELS.USA represents a straight difference between wholesale and ret

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