The diesel crisis is stirring up the oil markets in the United States and Europe

The diesel crisis is stirring up the oil markets in the United States and Europe

Factors such as insufficient refining capacity, strikes at French refineries and seasonal demand have put diesel inventories in the United States and Europe at dangerous levels, making diesel prices high in the United States, and the diesel crisis is hitting the world economy
.

On November 2, when the Fed raised interest rates by 75 basis points for the fourth time in a row, after 17 trading days, WTI returned to the $90 mark, and Brent crude oil also returned to more than $96 after 16 trading days, and supply concerns dispelled the impact of interest rate hikes and pushed international oil prices back to rise, of which the diesel crisis that is continuing to ferment in both the United States and European markets is one of
the main driving factors.
Based on the U.
S.
Energy Information Administration and oil price websites, this article will introduce the current price trend of diesel in the U.
S.
and European markets, as well as the supply and demand situation
.
From the current situation of the US and European oil markets, with the arrival of winter, the European embargo on Russian oil and the upcoming price limit imposed by the G7 on Russian oil, whether it is a single variety of diesel or international oil prices will likely usher in a new round of rally, which will make the world economy worse
.

Diesel prices in the United States were high in October 2022

According to the U.
S.
Energy Information Administration, in October 2022, the spot price of ultra-low sulfur diesel (ULSD) in New York Harbor in the United States averaged $4.
36 per gallon, which is the highest monthly average price since May 2022 and the second highest monthly average price
on record.
The diesel crack spread, the difference between the price of crude oil and the price of the same volume of diesel, hit an all-time high of $2.
14/gallon in October, even higher than the spread level
during the summer.

Ultra-low sulfur diesel spot prices in New York Harbor are at a high level
compared to U.
S.
benchmark prices in other parts of Chicago, the Gulf Coast or Los Angeles.
In October 2022, the spot price of ultra-low sulfur diesel in New York Harbor was an average of 56 cents/gallon higher than the Gulf Coast benchmark price, and from January to September 2022, the price in this area was only 17 cents/gallon
higher than the Gulf Coast benchmark.

Diesel inventories in both the United States and Europe have entered a state of crisis

According to the U.
S.
Energy Information Administration, the price increase in spot prices for ultra-low sulfur diesel in New York Harbor in October 2022 was due
to a combination of normal seasonal demand growth, abnormally low inventory levels, and limited quantities of distillates available for import.
Demand for distillates in the U.
S.
is seasonal, in part because it is mainly used for home heating
in the Northeast.
The start of the winter demand cycle for home heating oil could be one of the main catalysts for price increases, as increased seasonal demand tapped distillate inventories
in an already severely strained region.

Years of low inventories and tight supply have exacerbated diesel shortages in the United States, especially on
the East Coast.
U.
S.
refiners believe diesel demand continues to grow
strongly after recovering from the pandemic slump faster than other fuels such as gasoline.

Since the beginning of 2022, US distillate fuel oil inventories have been below the level
of a five-year (2017-2021) low.
Since April 2022, total U.
S.
distillate inventories have been below a five-year low and more than
20% below the five-year average.
Since the end of July 2022, distillate inventories in the northeastern U.
S.
, New England and the mid-Atlantic, have been more than
40 percent below five-year lows.

The latest weekly inventory report from the U.
S.
Energy Information Administration shows that U.
S.
distillate fuel oil inventories are currently about 20% below the five-year average, and the country has only 25 days of diesel supply stocks, and the market in some regions is very tight
.
As of the end of October 2022, diesel inventories in the United States were at their lowest level since 1951, and diesel inventories in its northern Middle East region were even lower
, NBC reported.

It is in this context that a fuel supplier in the United States has issued a diesel alert
to the East Coast region.
In the week of October 24-28, 2022, fuel supplier Mansfield said: "The East Coast fuel market faces diesel supply constraints
due to tight market supply and inventories.
The supplier said: "As the situation is rapidly deteriorating and market supply is changing significantly on a daily basis, Mansfield will enter the fourth level of alert to respond to market volatility
.
" Mansfield also adjusted the alert code for the southeastern U.
S.
to red, requiring 72 hours' advance notice of delivery where possible to ensure fuel and freight rates are guaranteed
at an economical level.
”

Similar to the United States, the European diesel market has entered a state
of crisis.
On October 26, 2022, Jon Imaz, CEO of Spanish national oil company Repsol, said on a conference call that the diesel crisis in Europe is heating up, parts of Europe are beginning to run out of diesel, "in some European countries, we have run out of distillates", and the sky-high price of diesel may be coming
.

Europe, a net importer of diesel, jet fuel and heating oil, has struggled to maintain ample inventories so far this year, as high gas prices have boosted demand by causing some users to switch to diesel, while some buyers have avoided Russian diesel, which sources half of Europe's diesel imports as the region prepares for
a ban on petroleum products at the end of the year.

Since the beginning of 2022, distillate stocks at the Amsterdam-Rotterdam-Antwerp storage center have been well below the five-year average, with more than 1 million barrels
below the five-year average for most of the summer.

Factors such as insufficient refining capacity and the Russia-Ukraine war have led to tight supply in the global diesel market

The U.
S.
Energy Information Administration believes that the rise in distillate prices in the United States and globally is due to a number of factors: low inventories of distillate fuel oil (mainly for diesel consumption) in the United States and globally; Increased demand for distillates, partly related to seasonal drivers, such as agricultural demand and home heating demand in the northeastern United States; The reduction in distillate production is related to seasonal maintenance of refineries and lower refinery runs following strikes in Europe; In February 2023, the EU will ban the import of petroleum products from Russia, and the cost of transporting distillates rises
.

The main reasons for the low distillate stocks are the decline in global refining capacity since 2020, as well as high demand in early 2022, with the disruption
of global oil trade related to Russia's war in Ukraine later in 2022.
U.
S.
distillate consumption in the summer of 2022, while consistently below pre-pandemic levels, increased
compared to 2020.
Even if consumption is not above average, higher relative consumption and lower refinery distillate production have led to a decline
in inventories.
The high price of crude oil has directly led to an increase in the price of petroleum products such as distillate fuel oil, while limited refining capacity has widened the refining oil price gap, further driving the price of oil products
.

As of Jan.
1, 2022, U.
S.
refining capacity was below pre-COVID levels at just 17.
9 million b/d
as of Jan.
1, 2022, due to a second consecutive year of decline in operational refining capacity in 2021, according to estimates by the U.
S.
Energy Information Administration.
When fuel demand plummeted at the start of the pandemic, U.
S.
refiners permanently shut down some refining capacity while converting some refineries to biofuel production facilities
.
In the fall of 2022, some refineries in the United States are being maintained, which also reduces the supply of
products such as distillates.

In addition, after the outbreak of the war between Russia and Ukraine, the United States banned the import of all Russian energy products
.
The United States has not imported any oil products
from Russia since April 2022.

In addition to U.
S.
refining capacity, strikes by French refinery workers have also led to the shutdown of several refineries in the country for most of the period from late September to the end of October 2022
.
Reuters estimates that French refineries closed due to strikes had capacity at 740,000 barrels
per day in early October 2022.
Falling refinery runs in France have further weighed on Europe's already low distillate inventories, with the impact likely to ripple through global markets
.
The tight supply of distillates in Europe poses more problems than in the United States, where distillates are more widely used as the main transportation fuel
for light vehicles.
In addition, the decline in natural gas exports from Russia to Europe may also drive demand for distillates, which can be used as a potential alternative fuel
for power generation, industrial or domestic heating oils.

Although seasonal factors such as home heating are important in determining changes in distillate demand in the United States throughout the year, distillate fuel oil is also used in the road transportation industry, which includes medium and heavy trucking, and large quantities of distillate are also used in commercial, industrial, and railroad industries
.
Therefore, the demand for distillate fuels is closely related to
economic conditions and expectations.

Concerns about higher interest rates and rising inflation may have contributed to the relative weakness in US distillate demand in September 2022
.
The most recent increase in distillate prices in October 2022 came after a period of decline in distillate demand in September, which eased some of the pressure on
distillate prices.
The decline in US distillate demand in September 2022 may have been partly due to caution on the part of rail operators, who may be reluctant to replenish diesel supplies due to the threat
of a rail strike at the time.
Fears of a strike by railroad workers in the US resurfaced in November 2022, which could also lead to weaker
distillate demand in the railroad sector.

Kuwait's newly operated Al Zour refinery, which will sell distillates and other petroleum products for the first time in the near future, could become a new distillate supply source
in the coming months, according to news media reports.
However, easing the pressure on inventories through new refining capacity is limited
by global distillate transportation capacity.
In the past, a large amount of distillate fuel oil exported from Russia flowed into Europe
through pipelines.
Global demand for clean-product tanker shipments has been increasing
as European buyers turn elsewhere to source distillates.
Clean product tankers are tankers that carry refined products, such as gasoline, distillates, or aviation fuel, unlike
tankers that carry dirty products such as crude oil or residual oil.
The supply of distillates needed to replace pipelines will likely need to be transported by tankers, and as European buyers increase their purchases from the Middle East and the United States, tanker routes will become longer
.
Even if distillate fuel oil inventories increase on the U.
S.
Gulf Coast or Asia, limited available shipping capacity due to higher tanker shipping rates may continue to drive price premiums in the northeastern U.
S.
region or European distillate fuel oil markets
.

According to the U.
S.
Energy Information Administration, refineries on the U.
S.
East Coast were operating at 102.
5
% in the week ending Oct.
21, 2022, and U.
S.
refiners were operating at full capacity.
The Biden administration planned to restrict U.
S.
fuel exports to restore inventories and lower domestic diesel prices, but U.
S.
refiners opposed the idea, saying that "banning or restricting the export of oil products could reduce inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.
S.
allies
during war.
" ”

In the winter of 2022-2023, the United States will face severe diesel supply problems
.
Klossa, global head of energy analysis at Oil Price Information Service, told USA Today: "Between now and the end of November, if we don't build up inventories, the wolves are coming
.
" And if this winter is cold, then the wolf will look big and ugly
.
In its October 2022 Winter Fuel Outlook, the U.
S.
Energy Information Administration estimated that heating costs for households in the northeastern United States that rely on heating oil will increase by 27 percent
in the winter of 2022 compared to last winter.

Goldman Sachs warned that diesel shortages in Europe and the United States could raise fuel prices
this winter.
Earlier in October 2022, Reuters quoted data from ship-tracking services that U.
S.
supply conditions had led traders to ship diesel and jet fuel destined for European markets back to the U.
S.
East Coast, which could become a global battle
for distillates.

This is the second diesel market tracker we have written
since August 19, 2022, "Global diesel shortages are driving continued U.
S.
refining industry.
" 。 Diesel or distillate, mainly used in transportation, agriculture, manufacturing and heating, etc.
, diesel or distillate fuel oil supply shortage and high prices, are not good for the global economy, the worsening global energy crisis since the second half of 2021 and the Russian-Ukrainian war, so that the global economic growth that is coming out of the shadow of the new crown epidemic slows down, the resumption of rising international oil prices and rising diesel and distillate prices, will undoubtedly bring additional pressure to the economic development of countries around the world
。