Reduced refining capacity combined with weather and geopolitical intrigue have eroded diesel stockpiles in the United States to noteworthy lows. Between the years of 2017 and 2021, the U.S. averaged 34 days of distillate supply, compared to just 25 days as of October 2022. Accordingly, while the price of gasoline has increased roughly 14% this year, diesel price has risen by 50%, exacerbating what was already a wide gap between the commodities. Last year, a gallon of diesel would have cost you 23 cents more than a gallon of gas. Now, that premium has exploded to a record $1.60 per gallon.
One major driving force of this price differential has been Russia’s ongoing invasion of Ukraine. Aside from Russia exporting far less refined diesel fuel than they had previously, they’ve also cut flows of natural gas to Europe, steeply raising the refining costs there and forcing end users like power plants to run their facilities on diesel instead. The lack of Russian diesel being delivered to Europe during heightened demand has greatly inflated the market price, attracting exports from Gulf Coast refiners in the United States. Per Edward Morse, head of global commodity research at Citigroup, “The Gulf Coast is not selling it to Philadelphia or New York, they’re selling it to Amsterdam and Rotterdam.”
At the same time, diesel fuel has not faced nearly the same demand destruction as gasoline during COVID. Consumers may have been staying home with their gas-powered vehicles in the driveway, but the farming, manufacturing, and transportation equipment that runs on diesel was in use the entire time.
Winter weather brings with it another fuel-switching conundrum, as homes in the northeast interchangeably use diesel to heat their homes instead of heating oil. Vikas Dwivedi, global oil and gas strategist at Macquarie Group, estimates that the typical winter depletes diesel and heating oil stocks by about 20 million barrels. An especially cold winter could draw down as many as 25 million barrels, which astute readers of the first paragraph will remember as America’s complete inventory on hand.
Soaring diesel prices are an excellent incentive for refiners to scale up production, and luckily that’s exactly what’s happening in the Gulf Coast, France, Kuwait, and even zero-COVID China. Dwivedi is cautiously optimistic that those international refining efforts will offset any severe winter demand, but even he maintains that there is, “a very credible probability that the East Coast could exit the winter with no distillates in stock.”
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Diesel Hits Record Premium Over Gas, Oil
